R A K A N A Y O U B S r . R e s e a r c h A n a l y s t

r a y o u b @ a w r a q . c o m

A R A B P O TA S H C O M PA N Y

C O M P A N Y R E P O R T

I N I T I A L C O V E R A G E

F E B R U A R Y 2 5 T H , 2 0 0 8

Table of Contents

Executive Summary .............................................................................................................. 2

Valuation ............................................................................................................................... 3

Arab Potash Company ........................................................................................................ 5

Current Ownership Structure ....................................................................................... 6

Subsidiaries ........................................................................................................................... 6

Potash History In Jordan .................................................................................................. 7

The Fertilizer Industry.....................................................................................................10

Product Cycle ...................................................................................................................10

Product Transportation ................................................................................................11

Product Production ........................................................................................................12

Market Trends ....................................................................................................................13

Performance .......................................................................................................................16

Outlook................................................................................................................................16

Appendix ................................................................................................................................18

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EXECUTIVE SUMMARY

The Arab Potash Company (APC) is one of a handful of potash companies around the world. Potash is a

specialty commodity as 95% of the product is used in the manufacture of fertilizer. Due to the low prices

of potash and several unprofitable partnerships, in the 1990s and early 2000s, the company was not

very profitable. This, however, is starting to change particularly as the demand for potash is growing,

fuelled by the main consumers in Asia (China and India).

The increase in the price of Potash is still at the beginning of the road. The current bulk contract realized

prices are expected to more than double in the next 3 years. This is primarily caused by the growth in

middle class and the changes in the eating habits in both India and China. In addition to that, the Bio-

Fuel dilemma is pushing prices of crops up as more of these need to be harvested out of less land.

Nonetheless, the demand for crops is the real reason behind the increase in the prices that have been

witnessed in the last 3 years. These, as have been mentioned, are expected to continue up to 2011.

Potash as an industry has a number of barriers to entry. Those barriers are enough to keep the players

safe so that new players will not be coming every other day to compete for market share. The high cost

of setting up a Potash mine(billions of dollars), coupled with the lengthy time it would take any company

(over 5 years) to start recovering any investment, makes this sort of investment only for the stabilized

players and the select few. Therefore, this put potash off the map as the sellers are a handful and the

big buyers who control over 70% of the purchased Potash, are also very few.

The next few years will usher in the completion of phase one of APC’s expansion. This will add about

400,000 Tonnes of annual capacity to APCs Production. This, coupled with the increase in price should

bring the revenues of APC up quite a bit by 2009. This pattern will continue up to 2012. APC is in the

design process of a second expansion that will bring its total capacity to 2.9 million Tonnes. This will not

be finished though until 2013 should the company decide to proceed with secondary expansion.

The long term sustained growth in revenues of Arab Potash Company is estimated at around 4%. The

current growth estimates are forecasted to fluctuate and this is largely due to the increase in prices. In

the long run, this price increase is expected to cool down and a long term growth of around 4% should

be maintained.

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ARAB POTASH COMPANY

All Figures In Jordanian Dinar 2008 2009 2010 2011 2012

Sales 345,257,300 448,834,490 552,066,423 662,479,707 761,851,663

Cost of Sales 172,628,650) 224,417,245) 276,033,211) 331,239,854) 380,925,832)

Gross Profit 172,628,650 224,417,245 276,033,211 331,239,854 380,925,832

Sales Expense (7,768,289) (10,098,776) (12,421,495) (14,905,793) (17,141,662)

Other Expense (Gov. Royalty) (12,920,000) (16,320,000) (16,320,000) (16,320,000) (16,320,000)

Administrative Expense (6,732,517) (8,752,273) (10,765,295) (12,918,354) (14,856,107)

R&D Expense Net

Operating Profit 145,207,843 189,246,196 236,526,422 287,095,706 332,608,062

Finance Revenue 5,178,860 6,732,517 7,728,930 9,274,716 10,284,997

Finance Expense (3,452,573) (4,488,345) (5,520,664) (6,624,797) (7,618,517)

Other Income 3,452,573 4,488,345 5,520,664 6,624,797 7,618,517

Other Expense (3,107,316) (3,107,316) (3,107,316) (3,107,316) (3,107,316)

End of Service Indemnity (1,726,287) (2,244,172) (2,760,332) (3,312,399) (3,809,258)

Earnings Before Taxes 145,553,101 190,627,226 238,387,704 289,950,708 335,976,485

Taxes Applicable (20,377,434) (28,594,084) (35,758,156) (43,492,606) (50,396,473)

Net Income 125,175,667 162,033,142 202,629,548 246,458,101 285,580,012

Dividends (29,161,125) (29,161,125) (29,161,125) (29,161,125) (29,161,125)

Outstanding Loans and Debts (7,081,000) (6,622,000) (7,078,000) (7,566,000) (5,892,000)

Depreciation and Amortization 20,024,923 40,395,104 40,852,915 50,348,458 50,282,210

Capital Expenditure (160,199,387) (60,592,656) (30,363,653) (30,474,067) (30,474,067)

Net Working Capital (NWC) (4,143,088) (5,341,130) (6,459,177) (7,618,517) 175,225,883

Free Cash Flow (55,384,010) 100,711,334 170,420,508 221,986,851 445,560,913

Terminal Value 2012 5,792,291,872

Present Value (49,450,009) 80,286,459 121,301,951 141,076,657 3,539,525,192

Net Income (Loss) 125,175,667 162,033,142 202,629,548 246,458,101 285,580,012

Interest Income 5,178,860 6,732,517 7,728,930 9,274,716 10,284,997

Interest Expense (3,452,573) (4,488,345) (5,520,664) (6,624,797) (7,618,517)

Depreciation and Amortization 20,024,923 40,395,104 40,852,915 50,348,458 50,282,210

EBITDA 146,926,877 204,672,418 245,690,729 299,456,478 338,528,703

Stock-Based Compensation - - - - -

Adjusted EBITDA 146,926,877 204,672,418 245,690,729 299,456,478 338,528,703

Present Value 3,832,740,250

Current Assets of APC 193,058,000

Enterprise Value of APC 4,025,798,250

Number Of Outstanding Shares 83,317,500

Cash Flow Discount Model 48.32

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ARAB POTASH COMPANY - VALUATION

In determining the fair market value of Arab Potash Company, several factors had to be taken into

consideration. The Operational Revenues of the company were analyzed and different scenarios were

constructed as to the forecasted revenue growth for the company. As a company involved in the

production and sale of a globally priced commodity, care had to be taken in the future forecast of this

commodity’s price.

APC is unique as it mines and sells Potash. Trading companies are subject to the rules of supply and

demand. The fact that APC is in the business of mining, production, and sale of a commodity means that

the year-on-year increase in revenues is dictated first and foremost by the global price of the

commodity. If the volume sold drops by 20% and price increases by 50%, the net revenues do not drop

by 20%, to the contrary they increase by 20%. The opposite is true as a drop in the price will wipe out

any gains in sales volume and can only exaggerate the losses in case volume also drops. This has to be

given its due weight in the valuation of any company dealing in a globally priced commodity.

Potash prices have increased more than 500% to reach $600/Tonne in spot trading. It traded in 2007 at

about $200/Tonne in contract (bulk). The wide spread between the spot and the contract price hints to

a continuing increase in the price of potash (contract/bulk) in the coming years. The Potash price was at

$100-$120 Tonne in 2002 vs. $200 a Tonne in 2007 - an increase of about 70%. This is small if compared

to other commodities (Oil, Gold) that surged 300%-400% during the same period.

A slowdown in growth is not expected in the near future. India and China are expected to continue

growing, at least at the current level of around 9%, for 2 to 3 more years. An anticipated slowdown will

bring this number to around 7%. This real growth in GDP will be more than sufficient to keep economies

growing at a healthy pace for at least the next 5 years. Demand for Potash is not expected to cool down

any time soon.

We have gone through the valuation of APC using different methodologies. Due to the reasons

mentioned above and in addition to the high reliance of APC on the future growth in demand and the

future increase in the price of Potash, we based our valuation of APC solely on Cash Flow Method.

Awraq’s target price for Arab Potash Company is JD48.32. The closing price for APC as of February 25th,

2008 was JD48.50. Our Recommendation for APC at the current level is a “Hold”. This considered, and in

light of the uptrend in the demand and prices of commodities and fertilizers that is expected to hold for

the coming 12-24 months, an upside potential for the industry still exists.

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ARAB POTASH COMPANY

The company was born of an idea to start potash works again after their destruction in the North West

side of the Dead Sea in 1956. This idea did not materialize until 20 years later when tests were made and

solid steps were taken to ensure the feasibility of such a company. The building of the company started

in 1979, and 1983 saw the Arab Potash Company commence production.

The original amount invested was USD $480 million. Financing for this came from international financial

institutions, aid agencies, as well as Arab development funds. An additional plant later followed with an

investment cost of USD $120.

The Arab Potash Company headquarters are located in Amman, Jordan. The main plants are located in

the southeast side of the Dead Sea about 110km south of Amman and 200km north of Aqaba. These

include the Potash, Salt, Bromine1, and Magnesia Plants. The facilities in the Dead Sea include 150 km2

of solar evaporation ponds in addition to the plants. In Aqaba, APC runs facilities and a loading terminal.

The Arab Potash Company is primarily a potash mining company, with subsidiaries to process other

minerals found in the Dead Sea water. It is located on the eastern shores of the Dead Sea and uses the

Potash found in the Dead Sea as its primary raw material. It uses the evaporation process to extract

minerals and salts from the sea water.

The production capacity of evaporation ponds was increased from 1.2 million Tonnes per year in 1983 to

1.4million Tonnes in the late 80’s. In 1989, a further upgrade to the plants lead to the capacity increasing

to 1.9 million Tonnes. Work is currently taking place to increase the capacity by another 0.4 million

Tonnes. This should come online in the first half of 2009. With this expansion, the total capacity will be

around 2.4 million Tonnes.

In 2003, Potash company of Saskatchewan (PCS) came into the picture and purchased 26% of the

company. The acquisition is slowly beginning to bear fruit, helped by the increase in demand for potash

and an upward trend in Potash Prices. The expansion set forth by APC will in no doubt ream rewards to

the company. The increase in capacity is the first step. Another expansion is planned in the next 5 years

which should bring the total capacity of APC from an expected 2.4million Tonnes by the end of 2009, to

over 3 million Tonnes in 2013. In 2005, PCS invested a further $18.5 million to raise its stake in APC to

27.69%

PCS is an integrated fertilizer producer. It is one of the largest Potash, Phosphate, and Nitrogen

producers in the world. In 1989 PCS went public and listed its shares in both New York and Toronto

stock exchanges. Through acquisitions, and as of 2006, PCS’ Potash operations represented 15% of the

world potash production, 22% or the potash capacity, and 55% of the world’s excess capacity. The

1 The Bromine Company is a Joint-Venture Company owned 50% by APC

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operations of PCS are global as it has mining rights or owns mines in Saskatchewan, New Brunswick-

Canada, New Mexico, North Carolina -USA, Dead Sea-Jordan and Dead Sea-Israel. It has nitrogen

facilities in Georgia, Louisiana, Ohio- USA and Trinidad- West Indies. Fertilizer and Ammonia plants are

present in Georgia, Alabama, Florida-USA and Chile “Sociedad Quimica y Minera de Chile”. In addition,

Animal Feed Production facilities are present in North Carolina, Missouri-USA and Brazil.

The current levels of productions of Potash by PCS are in the range of 11 million Tonnes per year. This is

expected to increase to about 14-15 million Tonnes per year in 5 years.

APC has around 2000 employees in Amman, Safi-Dead Sea, and Aqaba. In the Safi-Dead Sea area, APC

has constructed an 1100 employee township with all the amenities required at within a few kilometers

of its Safi Salt, Bromine, Magnesium Oxide, and Potash Processing Plant.

APC is ISO 9000 and 14000 certified.

CURRENT OWNERSHIP STRUCTURE

Shareholder Number of Shares %

Potash Corporation of Saskatchewan 23,294,614 27.69%

Jordan Government (Jordan Investment Corporation) 22,397,882 26.88%

Arab Mining Company 16,730,603 20.08%

Islamic Development Bank/Jeddah 4,300,000 5.16%

Iraqi Government 3,920,707 4.71%

Libyan Arab Company For Foreign Investment 3,386,250 4.06%

Kuwaiti Investment Authority 3,286,095 3.94%

Other Arab Governments 523,593 0.63%

Floating (Public) 5,477,756 6.57%

TOTAL - 83,317,500 100%

SUBSIDIARIES

KEMAPCO: ARAB FERTILIZER AND CHEMICAL INDUSTRIES LTD

KEMAPCO is a Joint – Venture Company between APC and Kemira Grohow of Finland. The company was

established in 1999. On February 1st, 2007 APC purchased the 50 percent interest owned by Kamira

Growhow in Kemapco. Kempaco production capacity is 150,000 Tonnes of Potassium Nitrate/Fertilizer

and 75,000 Tonnes of Dicalcium Phosphate per year.

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APC SALT UNIT

Formerly Jordan Safi Salt Company, APC Salt is now owned and operated by APC. The facilities have a

capacity to produce & export 1 million Tonnes of high grade industrial salt per year. They are located in

Safi – Dead Sea. It should be noted that the Salt Pans in the Dead Sea leave millions of tonnes of Sodium

chloride precipitate per year as part of the process of making Potash.

NIPPON JORDAN FERTILIZER COMPANY

NJFC is a Joint – Venture set between Jordanian and several Japanese companies. The structure of the Joint Venture is as follows:

Joint Ventrue Share Percntage

Agricultural Cooperative Associations (Zen-Noh) 30%

Jordan Phosphate Mine 20%

Arab Potash Company 20%

Asahi Industries Company 10%

Mitsubishi Chemical Corporation 10%

Mitsubishi Corporation 10%

The facilities of NJFC are in Aqaba and set up with a production capacity of 300,000 Tonnes per year of

NPK fertilizer and DAP Fertilizer (Di-Ammonium phosphate). The investment cost of this project was 83.5

million USD. Construction completion and start- up was in the year 1997. APC supplies 100 % of the

company’s requirements of Muriate of Potash. The product of high quality NPK is sold mainly in Japan.

Numira

Numeira was established on the southern end of the Dead Sea in 1997 with a capital of (2) million USD.

The production volume of its plant is about 20,000 Tonnes per year of Mixed Salts and 5,000 Tonnes per

year of Dead Sea Mud. The company is a fully owned subsidiary of APC. The company is the sole

provider of Dead Sea Raw materials to over 60 companies in Jordan. Numeira also provides APC with

bagging, handling & screening services.

POTASH INDUSTRY IN JORDAN

History of Potash

Potash refers to a group of water soluble potassium containing minerals. The name Potash came from

the process itself, as it is the water soluble ingredients of wood ash boiled down in a metal Pot. Potash

has been used for a long time in the manufacture of soap and glass. As potassium is part of a group of

essential nutrients used in agriculture, one of the main uses of potash is to produce fertilizer.

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Different variations of Potash exist:

Potash fertilizer potassium oxide, K2O

Caustic potash or potash lye potassium hydroxide, KOH

Carbonate of potash, salts of tartar, or pearlash potassium carbonate, K2CO3

Chlorate of potash potassium chlorate, KClO3

Muriate of potash potassium chloride, KCL

Nitrate of potash or saltpeter potassium nitrate, KNO3

Sulfate of potash potassium sulfate, K2SO4

The most common forms of Potash are Potassium Chloride, Potassium Sulfate, and Potassium Nitrate.

Potassium is left behind after sea water evaporates. This is how Potash is mined today.. Underground

deposits can either be dug out or pumped out using a technique called “Solution Mining”. The world's

largest deposits are in Saskatchewan, where giant seas evaporated millions of years ago. Although most

are mined, the Dead Sea deposits are rather harvested. Potassium deposits in Dead Sea water are

evaporated using large pans adjacent to the dead sea. Nonetheless, the majority of potash in the world

is actually mined.

The need for potash will not drop anytime in the near furture. The demand for fertilizer is currently in an

uptrend. The food requirements have slightly shifted in the past decade putting pressure on crops. In

addition, the requirement that bio-fuel be added to petrol mix in European countries only increases the

need for fertilizers in growing plants to make these fuels. As we are heading in a course to try and

depend less on oil as the only source of energy, and as long as bio-fuels come up as an alternative,

potash will play a main part as a fertilizer.

Potash and the Dead Sea - Jordan

The Dead Sea is very unique. It is the lowest Sea or actually lake on earth with its water level at around -

420 meters below sea level. It is a terminal lake of the river Jordan. The water flowing in from the

Jordan River has no way out except evaporation. This only leads to the concentration of minerals in this

lake. The minerals found in the Dead Sea include Calcium, Magnesium, Potassium, Sodium, and

Bromine.

“The source of the salts are believed to be leaching of soluble salts from the surrounding areas through

the ages.”2 The Dead Sea is a hyper saline lake of about 750km2. Due to the high content of salts, the

Dead Sea is devoid of life, except for a few rare seasons with high levels of rainfall when bacteria have

started to appear on the Dead Sea surface.

2 Arab Potash Company Manuscript

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Source: APC Unlike the mining of Potassium from Canada’s Saskatchewan region, the Dead Sea’s Potassium deposits

come in the sea water. Most of the deposit of Potash found in the dead sea come from local springs

flowing into it and from seepage. Rather than being dug out, the Dead Sea’s deposits are extracted using

a multiple stage evaporation process followed by harvesting, processing, and then drying. These

different stages produce raw materials that end up being used for production of fertilizers in their

different forms, and as industrial salts.

Future increase in the volumes of Potash mined will eventually reflect negatively as we are talking about

an already dying sea. It might be a while before the Dead Sea disappears but that will not be beneficial

for the Industry. The Dead sea might not disappear at all as there is an equilibrium level that it will get to

after several decades of evaporation. Another dimension is the proposed Red-Sea Dead-Sea canal. How

will this canal change the Dead Sea? The ecosystem might change. In 1980 (and again in 1992), and after

two rainy seasons, the dead sea turned reddish blue due to halo-tolerant (salt tolerant) red bacteria

floating on the surface from the usual very dark blue. A flow of water from the red sea, especially if its

salt content is much lower than that of the dead sea (i.e. it is not brine from a proposed desalination

plant), can have unknown consequences that can effect Dead Sea industry eventually.

Although the fear of over harvesting the Dead Sea stands, conservative estimates put the Dead Sea’s

Potash reserves at current usage levels at over 200 years. This is quite lengthy taking into consideration

the different plans to try and put an end to the evaporation of the Dead Sea. Irrespective of what

happens, the reserves of potash are there and will be there for centuries to come, renewed by the

springs coming into the Dead Sea and the mineral rock that surround it.

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

Water Magnesium Chloride

Sodium Chloride

Calcium Chloride

Potassium Chloride

Magnesium Bromide

DEAD SEA MINERAL CONTENT

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Effect of Potash Mining on the economy

The potash industry is a growing industry. The year 2007 will end with revenues topping $300 million.

The current levels put the industry’s revenues at just above 2% of GDP. If the current levels of revenue

growth are maintained, the total revenues will surpass $440 million by the end of 2009, making up

around 2.3% of the GDP at current forecasted GDP growth rates (6% down to 5.5% real GDP growth).

The current technologies used along with the increase in the price of Potash are proving to be beneficial

for the Potash industry.

THE FERTILIZER INDUSTRY

Both phosphate and potash were steady in price for a while. The price of potash was close to stagnant

from 1989 to 2003. The reason for this can be attributed to the high inventories of grains that were in

stock year after year. This did not make of an incentive for companies to increase the production as the

cost was too high and the price of the product was too low. In addition, and on the demand side, the

stock/use ratio was already at a 20% surplus. This did not make for a good case on the farmers side who

were going to buy more expensive fertilizer in an already saturated crop market.

The year 2003 saw a dramatic shift in pace. There was a big jump in demand from countries like India

and China as the demand for fertilizers increased for growing food. With this came the increase in oil

prices. This ultimately led to an increase in freight charges. As these charges, which were at once at a

convenient level for the producers, were so no more. The producers changed the prices to cover for the

hike in freight and that was the beginning of the run up in prices for both Phosphate and Potash.

The $20 / tonne of freight increased to $30 then $35 and got to $45. This led to a hike in the prices. That

was then and it did not stop; neither for phosphate nor for potash.

PRODUCT CYCLE

The Journey for a molecule of water takes about 12 months from the time it leaves the Dead Sea,

travelling through the ponds of APC and back to the Dead Sea Again. To get Potash as a product

(Potassium Chloride), a multi stage system is followed at the APC:

EVAPORATION AND DEPOSITION STAGE

The brine (raw Dead Sea water) starts off its Journey being pumped from the Dead Sea to Salt Pan 0A.

The first stage’s purpose is to get rid of the Sodium Chloride (NACL) from the water as much as possible.

For this, evaporation Salt Pans SP0A, SP1, SP2, and SP3 are used. As the water evaporates, the first solid

to precipitate is Salt. Now the water (flowing through gravity) goes to the PC-2 (pre-Carnallite pond).

After this the water starts flowing in C-3, then C-2, C-1, C-5, C-6, and C7. These are the Carnallite ponds

and this is where Carnallite gets harvested. Evaporation and deposition, and harvesting takes place from

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March up to late November. In December through February, the precipitated Carnallite is only harvested

as not much gets deposited due to the lower evaporation levels.

HARVESTING STAGE

The precipitated Carnallite from ponds C-1 to C-7 is usually 30cm to 60cm. This is done using six tracked

floating harvesters. The harvesters use DGPS technology for maximum precision and efficiency in

Carnallite recovery. In case of bad weather, they stop and continue the next day. Harvesting is done 24-

hours a day. The harvested product is 84% Carnallite and 16% sodium chloride. Each Carnallite pond is

harvested 3 times a year.

PROCESSING STAGE

1. Hot Leach Plant

The harvested Carnallite from the Carnallite ponds is purified and crystallized in a multistage process to form Potash (Potassium Chloride). This process purifies the potassium content after Sodium Chloride (Salt) has been mostly removed in the salt pans. (A detailed breakdown of the process is in the Appendix). 2. Cold Crystallization Plant

The cold crystallization plant is independent of the hot leach facility. It operates under a lower

temperature and therefore requires less energy. The end result though is crystallized potash that is

purer in content and is fertilizer grade. (A detailed breakdown of the process is in the Appendix).

3.Compaction Compaction converts the standard potash product into granular product. The compaction plant has a capacity of 100,000 Tonnes/year and targets the markets of Europe and Asia. The plant has been in operation since 1985 and has had many upgrades. This is part of the 1.8 Million Tonnes produced a year by APC 4. Industrial Potash Industrial Potash is higher grade potash primarily used for Industrial uses (99.2%). These needs fulfill the demands of the non-fertilizer sector. The plant was set up in 1998 with a capacity of about 14-Tonnes/hr.

PRODUCT TRANSPORTATION

Potash is either sold in the local market or transported to Aqaba for export.

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Potash shipped to Aqaba goes through shipping bins that load especially made bottom dump trucks.

These dump trucks deliver the Potash to the loading facilities in Aqaba. The capacity of these trucks is

about 50 tons each. The distance to the port facility is about 225Km.

The Aqaba storage facility has a capacity of 160,000 Tonnes with an additional 100,000 Tonnes under

expansion. Taking into consideration that the weather in Aqaba is almost always clear, shipments of

Potash do no stop from Safi-Dead Sea to Aqaba, year round.

POTASH PRODUCTION

Potash Production Worldwide for 2006 can be summed up as follows:

Country Million Tonne %

Canada

14.0 28.57%

Russia and Belarus

17.2 35.10%

Germany

5.8 11.84%

Israel

3.5 7.14%

China

2.7 5.51%

Jordan

1.7 3.47%

Brazil and Chile

1.3 2.65%

USA

1.2 2.45%

UK

0.85 1.73%

Spain 0.75 1.53%

TOTAL - World

49.00 100% Source: APC

For 2007, the production level is expected to return to the previous year’s level of about 55 MT.

Additional production capacity will be mostly coming from Canada, Russia, and China in that order.

Canada will be producing most of the additional 6 MT.

GLOBAL PRODUCERS OF POTASH

The Potash industry has several big players that produce the majority of the product. The biggest of

these is Potash Corporation of Saskatchewan (Canada).

BelarusKali in Belarussia is the biggest producer in the CIS countries with production levels expected to

reach 9 million in a few years. UralKali is the biggest producer in Russia with current production levels

topping 5 million Tonnes and an anticipated increase in volume will bring the levels to 7 million Tonnes

by 2011. OJSC Silvinit is the other major producer in Russia, and together with Belarus, they form a third

of the world production of Potash.

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Germany’s Potash, all 5.8 million Tonnes, is produced by one company, K+S KALI. The company produces

potassium chloride but is also involved in the production of specialty products such as potassium

sulphate, potassium chloride with magnesium, and magnesia kainit.

The Dead Sea is the source of Potash for both Arab Potash Company, Jordan and Dead Sea Works (ICL)

Israel. Dead Sea Works produces 3.5 million Tonnes and APC produces 1.8 million Tonnes. Combined,

the Dead Sea produces 5.4 million Tonnes (about 10% of the world production). This figure is expected

to exceed 6 million by the end of 2008.

MARKET TRENDS

Commodities have appreciated steeply during the last few years. Increase in demand, safe haven from a

depreciating US Dollar, and an increase in speculative activity driven by uncertainty have all been factors

for this increase. The same pertains to potash as it comes as part of a global increase in the demand for

fertilizers. Several reasons are behind this:

India’s rising middle class is growing. The close to double digit growth there has made India a trillion

dollar economy. This has reflected both positively and negatively on food supply. Food suppliers have

their hands full trying to deliver more and more food and that is good. The quantities of food and a

variety reflect the emergence of a new middle class that in turn requiring a better diet.

China’s economic growth. This growth has increased the GDP of the most populous nation on earth

and with this came an increase in the consumption of food and meat. Increase in animal feed meant an

exponential increase in the use of fertilizer to plant so as to grow this feed.

Brazil is a crop indicator. It is using fertilizers increasingly in its corn and soya bean crops for exporting .

It is also increasing its production of bio-fuels especially soybeans to produce biodiesel. This lead to an

increase in the consumption of fertilizers. Although soybean does not require as much fertilizer as corn,

its growth rate as a more energy efficient alternative to ethanol is on the rise in Brazil. Brazil’s ethanol

industry has seen a boom and has driven the price of soya bean up. The demand for soya bean for food

has also increased. In the beginning of 2007, the bushel of soya bean was at $7.25 - $7.50. By 2008, this

level has gone up to $12.00 - $12.50. End of January levels, the price of a bushel of soya bean stands at

$13.10 - $13.80.

The USA is the world’s number one user of fertilizers. Its farmers are subsidized. In addition to crops,

the USA has increased its use of bio-fuels especially ethanol which is produced using corn. This has

caused two things. The first is an increase in the demand for fertilizers, and the second is an increase in

the price of the bushel of corn. Corn was becoming more expensive irrespective, but this increase has

poured flame to the fire. The US has made it a law that gasoline sold have a part coming from bio-fuel or

renewable fuel. The fuel of choice currently is ethanol. Although cars can run on E-85 (85% ethanol, 15%

gasoline), most cars in the USA run on gasoline with a 90% gasoline and 10% ethanol. This is a trend that

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has found its way worldwide. In the beginning of 2007, the price of a bushel of corn was around $3.60-

$3.70. By the end of 2007, it is up to $4.60-$4.70. End of January, 2008 the levels are up to $5.00-$5.30.

Energy laws in Europe have been changed to require the use of bio-fuels as a percentage of car fuel.

This caused a spike in the demand for fertilizers to increase crop harvesting. Although this is true, the

phasing out of gasoline as a fuel is only in its initial stages. It might be a while before the legislation is

fully implemented. As the full implementation takes place, a further increase in the usage and therefore

the price of potash is anticipated.

South East Asia (primarily Malaysia and Indonesia) increased use of Potash in the Palm Oil industry.

Palm Oil is a vegetable oil that is also used for the production of bio-fuel(biodiesel). Palm oil has seen a

dramatic increase in price. In the beginning of 2007, palm oil was selling at 1,900 Ringgits per tonne. In

the beginning of 2008, this level was up to 3,080 Ringgits per tonne. End of January, 2008 the levels are

up to 3,350 Ringgits per tonne.

Source: Bloomberg, *Forecast – Awraq

The increase in the demand for Potash is expected to continue as harvested land will need more and

more nutrients. The growth in economies like India and China, along with Brazil will not slowdown soon.

This translates to a larger middle class that will require servicing, and this will include food. Countries

like Brazil, already the world’s largest producer of ethanol will only look to increase its lead. A slowdown

in the need for crops, both for food and fuel, is not anticipated in the near future.

With crude oil prices skyrocketing to jump over $100, the opposite may stand true. While at one time in

the past, paying dear money for alternative fuels was only a fashion amongst nature activists, as these

fuels were not feasible on a commercial scale, now they are not only feasible but also a way out.

Countries with land and the ability to grow energy producing crops will need to do so. If this is not done

for export, it will be done to sustain the local energy needs. These countries may find themselves the

fuel moguls of energy in the future.

0.00

100.00

200.00

300.00

400.00

500.00

600.00

2000

2001

2002

2003

2004

2005

2006

2007

2008

*

2009

*

2010

*

2011

*

2012

*

Net Realized Potash Price

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There are several points that have to be taken into account when talking about the potash industry.

When a company is established they are definitely strengths. When a company is thinking of

establishing itself, they are barriers for sure:

The cost to entry in the potash business are not affordable. It cost about $2.5 billion to build a new

mine.

Money can be available by many financial parties but that brings in the second barrier which is time. A

Greenfield operation can take between 5 to 7 years of development before any money is made back.

Time is usually the breaker.

Lack of government intervention is also a strength that this industry is characterized with as opposed

to nitrogen production that has quite a government involvement.

A current annual growth in demand of 5%-6% which is expected to ease to 3%-4% in the next 3-4

years. This is up from 1-2% a decade ago.

PERFORMANCE

Financial

The company is experiencing a surge in revenues that affecting the bottom line positively. The sales for

the company as a fertilizer producer depends on the two factors previously mentioned: Demand and

Price. Currently, there is a global increase in demand accompanied with an exponential increase in price.

The Arab Potash Company’s 2007 sales revenues closed at JD367,295,000, as opposed to JD226,559,000

for 2006. The increase in sales revenues was first and foremost due to the increase in volume and price.

In addition, a gain was realized with the settlement of the arbitration proceedings from the Magnesia

Plant. The future cash generated by the firm is expected to grow at a faster pace as the prices of Potash

rises. The spread between the contract (bulk) price and spot price has already passed $300. This is a 33%

discount on spot price. The contract (bulk) price usually chases the spot price so getting to $400 a Tonne

is attainable. This difference translates to an increase of JD200 million in revenues, not counting the

increase in production volume.

The Production capacity increase of 400,000 – 500,000 Tonnes is expected to hit the bottom line in

2009. The market conditions involving an increased use of Potash, a looming global shortage of grains,

and an increase in demand for bio-fuels will only put more pressures on the price of potash an in turn

bring in more revenues for Arab Potash Company. A 400,000 Tonnes increase in production at current

price will add about JD75 million to Revenues.

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Market

The Potash market is well structured. This simplifies the process of buying and selling, and increases the

clarity of both sides so as to concentrate on what is more important, which is the product at hand. The

number of sellers in this market are few. The major buyers are also not too many. The level of

speculation in the selling price is minimal as the two biggest buyers of this product do so on a contract

basis.

Price is dictated by demand and supply forces. Nonetheless, with a consumer as huge as China the

bargaining and negotiating power can be intimidating. If not so, it can be a headache at least. As so,

dominants of the price fall squarely on the costs (mining, production, freight), market (demand forces),

and the bargaining power of the biggest buyer. This buyer can talk down the price because of 7 million

Tonnes to be purchased by him only.

Negotiations are under way with China to settle on a Price for 2008. Following China’s negotiations will

be the negotiations of another big consumer and that is India. These negotiations will settle with a

contract for potash delivery starting July 2008 and ending June 2009 (Indian Fiscal Year). Following the

price increase for China, there will be negotiations to decide the price increase for India. Most probable,

it will be determined by the negotiations outcome with China.

Reflecting on the market trends, the Arab Potash Company is undergoing an expansion program that will

bring its production capacity up by an estimated 20%. The capacity after completing the expansion

should be in around 2.4 million Tonnes/year from the current 1.9 million Tonnes/year. This expansion

should be fully operational by the first half of 2009. The preliminary stages of a secondary expansion

phase are currently being studied. If the decision is taken to go ahead with the expansion, this expansion

and upon completion will further raise the production capacity from the 2.4 million Tonnes/year in

2009 to a solid 2.9 million Tonnes/year by 2013. This is an increase of over 50% from the current levels.

There will be an expected increase in demand for the growing production capacities as the avenues for

the potash usage are increasing. Although potash usage is primarily used as a fertilizer, the diversified

use of crops as both for food and for fuel has increased the demand for fertilizers to increase the crop

yield. Will this increase be sustained is yet to be seen. Are bio-fuels sufficient to fulfill the needs of a

fuel hungry world? Problems already exist as shortages of certain crops are causing a scarcity of food

supplies in some countries. Now, the source of this food supply has to adequately be a source of fuel.

OUTLOOK

The current negotiations are going to dictate the pace at which the price is going to increase. The

Chinese are in negotiations for a price on their 2008 contract. The range of increase is anticipated to be

from $100-$150 a tonne. It could even reach $200 extra a tonne, which will bring the price per tonne to

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about $360-$430 / tonne CFR from a current $260-$280 CFR. With a bit of luck for APC, the price can be

as high as $500 /tonne CFR.

The increase in price coupled with the increase in capacity should prove lucrative for the Arab Potash

Company. The company should see no problems in demand for their products in the next two years as

they do not depend on walk in clientele but rather a set number of clients that they build long term

relationships with. This is the case with the whole industry.

A dramatic increase in bio-fuels is not expected to materialize as to effect the expected growth in

demand for both fertilizers and in turn potash. This comes for several reasons:

The increase in the production of bio-fuels starts with land being spared to be planted for fuel. If this

is done, then food left for land will be depleted as farmable land is a scarce resource and available in

limited quantities.

The infrastructure needed in the form of processing plants to produce bio-fuels does not come cheap

and will require both time and money to build.

When these are done, more investment is expected in means of transportation to move the bio-fuel

from the plant to the consumer. These can be long trips and require expensive infrastructure.

The next step in this process is distribution. This requires building new stations to store and distribute

ethanol or bio-diesel. Existing ones can be modified to do the job. Bottom-line, consumers need to get

the product to their neighborhood at the end of the day.

The last step of the process and the most important step is the vehicle. The crops will not be useful

nor will be ethanol, the distribution tanks, or the ethanol stations if consumers do not have vehicles

that run on ethanol or bio-diesel.

The years 2008 and 2009 are expected to be positive for the potash industry as demand will still outpace

supply. By 2010 a balance will start to occur as the growth in supply will start to fall in line with the

growth in demand. This is due to the increase in supply that should be hitting the market. Potash

companies are working on increasing their productions capacities and this should reflect start to show in

the next two years.

A drop in consumption in not anticipated soon as the two main consumers in Asia (China and India) have

their reasons to keep the consumption high. For China, it is a matter of feeding its people, and China has

the hard currency to pay for the price of Potash at elevated prices. As far as India is concerned, it is a

matter of National Security. The government might have its own problems “financially or otherwise”,

but keeping the farmers at bay and making sure the population has proper food is a main priority.

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APPENDIX Source: APC 1. Hot Leach Plant

Carnallite Processing The harvested Carnallite is received, dewatered and decomposed with water in two stages of agitated tanks. The resulting solids is a mixture of Potassium Chloride and Sodium Chloride known as Sylvinite. This mixture is dewatered, washed, and sent to the Sylvinite processing stage. Sylvinite Processing The Sylvinite cake is leached using in a two - stage process. Heated lean brine, returned from the crystallization process, is used for leaching the Potassium Chloride solids. The hot brine, now saturated with Potassium Chloride is clarified in a hot thickener. The thickener's overflow is pumped to the Crystallization process, and the underflow slurry containing Sodium Chloride crystals is dewatered, re-pulped with waste brine and then pumped to the tailings area. Crystallization The hot brine from the thickener overflow, which is saturated with Sodium and Potassium Chlorides, is cooled successively in a six- stage vacuum crystallizing system from 93o C to 42o C. Upon cooling, Potassium Chloride (KCl) decreases in solubility, and crystallizes under controlled conditions. Product Dewatering Potash slurry from the last stage crystallizer is directed to the product hydro - cyclones where partial dewatering takes place. The underflow of the cyclones is sent to centrifuges for further dewatering. Drying The cake from the centrifuges is conveyed to an oil-fired concurrent rotary dryer to remove the last traces of moisture entrained with the crystals. From the dryer, the product is sent to a fluidized bed cooler and then to the screening system, while the dust is collected using a cluster of high efficiency cyclones. Screening The product coming from the dryer goes to the screening unit where it is segregated into two product grades: Standard and Fine. Standard potash is cooled by using a fluidized bed cooler. An anti- caking agent is added to all products in carefully controlled amounts to minimize the natural tendency of Potash to agglomerate during storage and shipment. Free -flowing properties are thus ensured to facilitate handling of these products by the customer. De-dusting systems To ensure a clean environment and to minimize Potash losses as dust, APC has installed several systems such as bag filtration units and high efficiency cyclones.

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2. Cold Crystallization Plant

Carnallite Receiving High grade Carnallite (coarse Carnallite) is separated through an initial wet screening process. This high-grade Carnallite is fed directly into cold crystallizers. The wet screen slurry is mixed with the discharge of the cold crystallizers in a draft tube reactor. When solar pond brine mixes with crystallizer brine in a reactor, precipitation of Carnallite occurs. The slurry from the reactor is increased in density in the Carnallite thickener. The overflow of which is returned to the evaporation ponds. Floatation Carnallite thickener underflow is improved by the use of a floatation technique in which the Sodium Chloride is floated and pumped back to the tailing tanks. Sink Slurry is settled in a floatation and dewatered in centrifuges. Centrifuge cake (Fine Carnallite) is conveyed to the cold crystallizers. Crystallization Coarse Carnallite and Fine Carnallite are decomposed in a two stage crystallizer system in the presence of water. In the process, Potassium Chloride crystals are formed. Crystallizer discharge slurry is wet screened to remove large particles of Carnallite or Sodium Chloride. Cold Leaching The process ensures the required 0.7% MgCl12 in the dry product via a two stage leaching and dewatering process of the crystallizer product. Drying Second stage cake is dried to a required 0.1% moisture content. This is followed done in a rotary drier, fired with fuel oil. This is followed by a rotary cooling process at atmospheric temperature. Screening Dry Product is separated in the screening: Standard and Fine.

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