Dcvument of The World Bank FOR OFFICIAL USE ONLY 4W R S OOR -TO Report No. 6932-JO STAFF APPRMISAL REPORT HASHEMITE KINGDOM OF JORDAN SHIDIYA PHOSPHATE MINE PROJECT December 18, 1987 Energy Division Asia Technical Department TI s docement has a resftkcted ditibution ad may be used byr only h the perfonnmnce of thi offcial dues. Its contents may not othbise be dlsosed Wodd Bak auhaton. HASHEMITE KINGDOM OF JORDAK SHIDIYA PHOSPHATE MINE PROJECT CURRENCY EQUIVALENTS Crrrency Unit - Jordan Dinar (JD) JD 1.00 US$3.02 JD 0.33 - US$1.00 FISCAL YEAR January 1 - December 31 WEIGHTS AND MEASURES 1 cubic meter (m*') 1.308 cubic yards I metric tonne (t) - 1,000 kilograms (kg) 1 metric tonne (t) 2204.6 pounds 1 kilometer (km) X 0.62 mile ABBREVIATIONL AND ACRONYMS ARC - Aqaba Railways Corporation BCM - Bank Cubic Meters DAP - Di-ammonium Phosphate JEA - Jordan Electricity Authority JPI - Jordan Fertilizer Industries JPMC - Jordan Phosphate Mines Company Ltd. HIS - Management Information System mt - Million Metric Tonnes mtpy - Million Tonnes per Year ROM - Run-of-Mine t - Metric Tonne TCP - Tricalcium Phosphate TPC - The Aqaba Port Corporation tpy - Tonnes per Year FOR OMCIL USE ONLY HASHEMITE KINGDOM OF JORDAN SHIDIYA PHOSPHATE MINE PROJECT STAFF APPRAISAL REPORT TABLE OF CONTENTS Page I. INTRODUCTION .............................*............... 1 A* Background .... 1 B. Bank Role and Sector Lending Strategy ..................... 1 C. Rationale for Bank Involvement 2 It. THE JORDAN PHOSPHATE MINES COMPANY, LTD. (JPMC) ........... 2 A. History 2 B. Organization and Management 3 C. Manpower and Training ... 4 D. Current and Future Operations 5 1. Mining Unit 5 2. Fertilizer Unit .....*....*.................. 8 g. Accounting Arrangements and Audit * 9 III. THE MARKET FOR PHOSPHATE ROCK AND PHOSPHATE FERTILIZERS ...... 9 A. Phosphate Fertilizer World Demand/Supplynd/Supply.......... 9 B. World Phosphate Rock Supply 11 C. Phosphate Rock Supply/Demand Balance and World Trade....... 12 D. Phosphate R'ck and Fertilizer Prices .................... 13 E. The Market for Jordanian Phosphate Rock and Fertilizer .... 15 IV. THE PRWOECT-SHIDIYA PHOSPHATE MINE 16 A. Project Objectives 16 B. Phasing of Mine Development and Sector Strategy ........... 17 C. Project Description 17 De Detailed Features IS 1* Mine Development .. .................................... 18 2. Beneficiation Plant 20 3. Infrastructure Development 20 4. Manpower 21 5. Ecology 22 6. Technical Assistance 24 7. Project Costs ..... 25 8o Financing Plan . ... . 9. Procurement and Disbursement 28 10. Project Management and Implementation *................ 30 This report was prepared by Messrs. C. Wardell and A. Covindassamy, with. the assistance of Mrs. N. Hadjitarkhani (ASTEG), Messrs. W. F. Sheldrick (ASTIF), and J. Cape, J. Moussalli, S. Houghtaling, and G. Richards (Consultants). Word processing assistance was provided by Ms. M. Cuffley (ASTEG). This document has a restricted distribution and may be used by recipients only in the petformance of their official duties. Its contents may not otherwiac be disbcsed without World lank authoization. -ii- Page No. V. TRANSPORT AND PORT INFRASTRUCTURE ...................... *&****** 31 A. Land Transport Arrangements ............................... 31 Bo Aqaba Port *** *... 32 VI. FINANCIAL ANALYSIS .... 0o...0 33 A. Past and Present Financial Performance . 33 Bo Financial Projections 35 1. Mining Unit 36 2. JPMC Overall Future Financial Situation 38 C. Financial Rate of Return and Sensitivity Tests 40 D. Project Risks * 43 VII. -ECONOMIC ANALYSIS ........es................ 43 A* Economic Rate of Return ................................ 43 B. Sensitivity Analysis 44 C. Foreign Exchange Balance and Employment 46 VIII. AGREEMENTS REACHED AND RECOMMENDATION oo..o..o**..o........ 47 ANNEXES 2-1 JPMC Organization Chart 00...00.0.0.0..6..................... 49 2-2 JPMC - Action Plan for Managerial Integration .....ooo.oo.os. 50 3-1 Phosphate Fertilizer Long-Term Supply/Demand .0.............. 51 3-2 Phosphate Rock Supply Capacities; Phosphate Rock, Future .... 52 Demand by Main Countries and Economic Regions, 1985-2000 3-3 Phosphate Rock International Trade S*o,o00o0oo0o000000o0o00o 54 3-4 Past and Future World Phosphate Rock and Fertilizer Prices .. 59 3-5 JPMC Sales and Marketing--Phosphate Rock .....61 3-6 JPMC Sales and Marketing--DAP and Phosphoric Acid ........... 63 4-1 Tentative 15-year Production/Export Plan .......0....0..0..0. 65 4-2 Vertical Geological Section .................................*, 66 4-3 Project Organization Chart .oo...o.o..oo......o....oe..o..o.. 67 4-4 Procurement Schedule .00.0.0..... **....0.*0. 0. 00 68 4-5 Disbursement Schedule -............o.o..o..o.o.o...o.o......o 69 4-6 Project Implementation Schedule ............................ 70 -iii- ANNUES (Cont'd) Pa8 6-1 JPMC Past Financial Statements .............................. 71 6-2 JPMC Mining and Fertilizer Units Operating Costs ............ 75 6-3 Mining Unit Financial Projections ........................... 78 6-4 Fertilizer Unit: Summary of Financial Projections (1986-97).. 81 6-5 Future Phosphate Rock, Fertilizer and Fertilizer Input Prices 87 6-6 JPMC Future Sales Program ............................. 88 6-7 Mining Unit Production Plan 1987-98 ........................ 89 6-8 Mining Unit Investment and Financing Plans .................. 91 6-9 JPMC Consolidated Financial Statements 1986-98 ............ 92 6-10 Project Financial Analysis .................................. 95 6-11 Working Capital and Operating Costs ......................... 97 7-1 Port Transit Economic Cost and Tariff ....................... 98 7-2 Land Transportation Cost ...............*................... 99 7-3 Project Cost Benefit Analysis ............................... 100 7-4 Foreign Currency Balance ..*.....**....o.*.o..o.*....o*..*.*o 105 8-1 Documents Available In the Project File ..................... 106 14AP5 IBRD No. 19920 R IBRD No. 19921 1BID No. 19922 Asia Technical Department December 1987 -iv- SASDISITE KINGDOM OF JORDAN SIDIYA- P-SPUATE MINE PROJCT LOAN AND PROJECT SIUIIARY Borrower: Jordan Phosphate Mines Company Ltd. (JPMC) Amounts US$31 million equivalent Terms: 17 years, including 4 years of grace, at staoidard variable interest rate. JPMC will bear the 'orelgn exchange and interest risk. ProJect Description: The project is an Important first step In th.} development of the large unexploited Shidiya phosphate deposit which will enable Jordan to Increase its export of phosphate rock and to Increase foreign exchange earnings. It will also address the existing phosphate dust pollution problem at Aqaba port. The project will finance open-pit mine equipment including draglines, trucks, shovels and ancilliary mining equipment; dillsite equipment including screening plant with product storage and handling facilities; and associated social and Industrial infrastructure, including townsite development, water and power supply and distribution, and an access road. The project's technical assistance component will, inter alia, assist in orientating research to address the optimal configuration and economics of future development stages at Shidiya. Estimated Costs: Local Foreign Total -==-- USs million Mine Equipment 2.9 30.3 33.2 Millsite Equipment 1.3 6.2 7.5 Civil Works and Infrastructure 8.1 8.2 16.3 Dust Contro: Equipment 0.6 1.5 2.1 Engineering & Technical Assistance 4.6 0.7 5.3 Base Cost (September 1987 Prices) 17.5 46.9 64.4 Physical Contingencies 0.9 4.7 5.6 Price Contingencies 0.7 2.1 2.8 Installed Cost 19.1 53.7 72.8 Working Capital 4.3 10.0 14.3 Total Project Cost a/ 23.4 63.7 87.1 Interest During Construction - 1.9 1.9 Total Financing Required 23.4 65.6 89.0 a/ The project will be exempted from import duties and taxes. Flnanclx Plan: Local USrelu - -- ~UST m-illion IBRD Loan - 31*0 31.0 JPNC 23.4 34.6 58.0 Total 23.4 65*6 89.0 Estimated Disbursements of Bank Loan: Bank FY 1988 1989 1990 1991 1992 1993 1994 Annual 2.0 7.9 7*5 5.6 3.8 3.4 0.8 Cumulative 2.0 9.9 17.4 23.0 26.8 30.2 31.0 Economic Rate of Return: 372 I. INTRODUCTION A. Background 1.01 The Jordan Phosphate Mines Company Ltd.(JPMC), in which the Government of Jordan is the majority shareholder, has requested a Bank loan of US$31.0 million equivalent to help finance the Shidiya Phosphate Mine Project. Phosphate is the most important of Jordan's mineral resources and provides substantial foreign exchange earnings (US$231 million gross in 1986) through the export of phosphate rock and thereby makes a substantial contribution to Gross National Product. A portion of phosphate production provides feed to JPMC's chemical fertilizer plant at Wadi II on the Aqaba Gulf coast and the export of fertilizer yields additional foreign exchange earnings (US$113 million gross in 1986). The Project will be the first stage development of the Shidiya deposit which contains vast reserves of phosphate rock. The project will increase Jordan's phosphate rock production by 1.5 million tonnes per year (mtpy) to a level of 8.2 mtpy by 1989 and will increase export of phosphate rock to 7.1 mtpy by 1989. It will provide a foundation for future phases of mine development at Shidiya. which could ultimately reach a combined production level in excess of 10 mtpy rock product within the next 10 years when all other existing phosphate mine areas in Jordan are expected to reach the end of their physical/economic life. The new deposit will provide Jordan with a low production cost base for the long-term development of its phosphate industry. B. Bank Role and Sector Lending Strategy 1.02 Jordan's last two national development plans aimed at restructuring the economy to achieve a wider manufacturing base, reduce dependency on external grants and spread development among different regions. The Bank's assistance to Jordan has been designed to support these objectives, and in particular (i) diversify the country's economic base; (ii) promote exports; (iii) alleviate manpower and infrastructure constraints in the productive sector; and (iv) encourage a more balanced growth among regions. Their objective- are discussed in detail in the Bank's review of the 1981-85 Five-Year Plan (Report No. 4179-JO of May 1983); in a study on Export Strategy and Promotion in Manufacturing Industries (Report No. 4170-JO of June 1983); and a Development Study on Employment Strategy and Growth, in the context of a weakening regional demand for Jordanian labor (Report No. 5117-JO of June 1984). 1.03 Bank assistance in the industrial sector is directed at a better utilization of domestic resources and manpower skill, toward the establishment of a broader export-oriented industrial base. Hitherto, Bank involvement in the industrial sector consisted of a pilot Engineering Credit (1975) in the potash sector; a Potash Project (1978j; an Energy Development Project (1983); several Power Projects; and a Second Potash Project (1986). IFC's involvement in Jordan has been in the production of ceramic tiles, aluminum fluoride, phosphate fertilizers, and bricks, and for the development of Amman capital market. The Bank's involvement in the -2- phosphate mining sector to increase phosphate rock exports and expand utilization of the country's natural resources is, therefore, within the Bank's sector lending strategy. Co Rationale for Bank Involvement 1.04 In late 1981, the Government of Jordan requested the Bank to assist in reviewing terms of reference for a pre-feasibility study at Shidiya. Over the 1982-86 period, the Bank has continuously assisted the Government to monitor project preparation and the Government and JPMC to Identify an optimum project configuration of manageable financial propor- tions, and has successfully advised the Government and JPMC regarding reducing the project size from 9 mtpy to 1.5 mtpy. 1.05 The rationale for Bank involvement is that (i) the Bank will continue to provide technical advice and assistance to ensure a proper techno-economic evaluation of further developments at Shidiya and an optimal phasing of such development in relation to the depletion of existing mines; (ii) the Bank's participation in the high eccnomic rate of return initial phase of the Shidiya mine development will contribute to restore potential private partners' confidence in JPMC for future expansion phases, at a time when the financial impact of JPMC's absorption of the Jordan Fertilizer 'ndustries Company (JFI) has put the company in a temporary tight cash position and has considerably reduced JPMC's traditionally impressive profitability; (iii) through the Project, the Bank would work closely witlh JPMC to ensure that dust control measures are taken to reduce dust pollution at Aqaba port to internationally accepted environ- mental standards; and (iv) the Project will increase the country's exports by about US$45 million per year at a time when remittances from Jordanian workers in the Gulf countries are stagnating, and Arab countries' grants are becoming scarcer. 1.06 The project was appraised in May 1987, by a mission consisting of Messrs. C. Wardell, A. Covindassamy, and W.F. Sheldrick (Bank) and Messrs. J. Cape, J. Moussalli, S. Houghtaling and G. Richards (Consultants). II. THE JORDAN PHOSPHATE MINES COMPANY LTD. (JPMC) A. History 2.01 Phosphate deposits were discovered in Jordan in 1908, during the construction of the Hijaz railway linking Amman to Aqaba. JPMC was formed in 1953 with a capital of JD 1 million, to exploit the phosphate deposits at Ruseifa, 15 kilometers north of Amman. In 1962, mining commenced at the El Hassa mine, 136 kms south of Amman and 200 kilometers north of Aqaba port. The company further expanded in 1979 with the start of production at the El Abiad mine, 20 kilometers north of the El Hassa mine. The capital of JPMC has increased several times and by the end of 1986 had reached JD 20.0 million, of which 90% is owned by the Government of Jordan, and the remaining 10% by many thousand Jordanian private shareholders. In late 1986, the Government placed the operation and management of the JFI's -3- chemical plant at Aqaba under the responsibility of JPMC. JPMC Board of Directors approved in 1987 a resolution to increase the company's capital by 50% (JD 10 million) by floating no par shares on the Amman stock market, to be purchased by private investors at a price 1402 above the nominal value of the shares. When this capital increase (para. 6.21) is obtained, it would provide JPMC with about JD 25 million in cash (including JD 14 million of paid-in surplus), and will put about 40% of JPMC capital in private hands. B. Organization and Management 2.02 JPMC is a commercial enterprise, with the status of a commercial corporation under the general supervision of the Ministry of Industry and Trade. It is managed by a Board comprised of members appointed by the Ministry of Industry and Trade, and one member represents the private shareholders, (Annex 2-1). The Board nominates, from among its members, the Managing Director. Directors of the main departments are selected by the Managing Director, subject to Board approval. Below the Director level, appointments are made by the Managing Director. JPMC's management is satisfactory and highly efficient. The allocatior of responsibilities between the Ministry, the Board and the Managing Director is satisfactory, and entrusts the Board with corporate strategy, while the Managing Director is fully in charge of operations and management with sufficient freedom of action regarding operations, personnel management, investment and borrowing policy, marketing, foreign currency management and finance. 2.03 The company's Management Information Systems (MIS) in the Mining Unit are satisfactory, in particular for cost accounting, personnel administration and geological research. Data are readily and quickly available, and part of the MIS is computerized. MIS development is less advancel in the Fertilizer Unit, but will be progressively modernized, using the Mining Unit system as a model. 2.04 Following JFI's absorption, JPMC is reorganizing itself, on the basis that the production units (Mining and Fertilizer) will keep their respective operational and managerial autonomy, while the functional departments would be common to both units. In the functional departments, the integration for marketing and finance is well advanced. No major changes ate needed in the technical units. However, the integration of the administrative, internal audit, corporate planning and budgeting functions is less advanced. Such integration is necessary to improve cost effective- ness. During negotiations, assurance was obtained on the implementation of an iction Plan for Managerial Integration (Annex 2-2) to complete JFI absorption, regarding (i) the integration of the Administrative Department; (ii) strengthening of Financial Studies; (iii) the development of fully compatible financial and cost accounting systems; and (iv) the establishment of Planning, Internal Audit, Management Control, Financial Studies and Budgeting units. Further development of the Financial Studies, Corporate Planning, and Internal Audit Units will be facilitated through the project technical assistance component (para. 4.27). -4- C. Manpower and Training 2.05 JPMC employs 4,167 personnel, 341 at the Amman headquarters, 3,028 In mining and 798 at the fertilizer plant at Wadi II. The table below gives a broad breakdown of the employees. Jordan - JPMC Manpower (as of December 1986) Amman Headquarters Staff 341 El Hassa Mine 1,608 El Abiad Mine 662 El Hassa/El Abiad Housing Area 94 Headquarters Staff temporarily assigned to El Hassa/El Abiad 25 Ruseifa Mine (abandoned) 461 Ruseifa Research Center 43 Aqaba Port Staff 135 Fertilizer Plant 798 Total 4,167 Source: JPMC 1986 Annual Report. 2.06 The quality of the workforce in term of qualifications, experience, commitment and initiative is good at all levels and labor relations are good. Personnel management is centralized, the Managing Director has complete autonomy regarding job grading, staff hiring, remuneration, reassignment, performance evaluation, promotion and sanctions. This freedom is used effectively and individual performance is the determining factor for salary increases and promotions. 2.07 The Company has developed over many years of mine operations, a team of highly qualified and experienced managerial personnel, technicians, skilled and semi-skilled workers and the existing mining operations can be considered highly productive. Since the closure of the Ruseifa mine in late 1985, 461 mine personnel have been kept on payroll. Many of the managerial, technical and skilled and semi-skilled workers from Ruselfa will find employment at Shidiya starting 1987. In late 1986, JPMC absorbed within its organization the former JFI personnel at the fertilizer plant, including plant management and all on-site operational, maintenance and administrative personnel. 2.08 Because of its attractive pay scales, JPMC has no problem recruiting and training personnel at all levels and there is an ample supply of skilled labor. Polytechnic institutions (Amman, Irbid, Tafila) run by the Ministry of Education have mining departments which yield annually approximately 100 engineers and technicians. JPMC operates its own training centres at El Hassa and Ruseifa for mechanical and electrical maintenance and welding, which yield about 40 technicians per year. Extensive on the job training opportunities exist within JPMC and the -5- company has recruited machine operators and skilled technicians/maintenance personnel from other industrial sectors and among personnel returning from Gulf states. 2.09 The salary level offered by JPMC is competitive with the private sector, but reflects the high cost of skilled labor in Jordan, due to the existence of employment opportunities in the Gulf states. The median salary level is about JD 250 per month (US$755) plus housing, health and pension benefits. The salary range is relatively narrow, from JD 200 per month to JD 700 per month. This gives JMPC a strong incentive for mechanization and efficient personnel arrangement. D. Current and Future Operations 1. Mining Unit 2.10 In the last decade, despite a weak world market for phosphate, Jordan has increased its annual production at an average rate of 15% and has tripled its exports of phosphate rock as summarized below. Jordan is now the fifth largest phosphate rock producer after the USA, the USSR, Morocco, and China, and the third largest exporter of phosphate rock after Morocco and the USA. Jordan - Phosphate Rock Production and Exports 1977-86 (S000 tonnes) Year Production Export Domestic Sales a/ TOT 1,771 1,794 - 1978 2,493 2,159 - 1979 2,845 2,728 - 1980 3,907 3,612 - 1981 4,244 3,523 - 1982 4,390 3,562 239 1983 4,748 3,701 616 1984 6,263 4,695 975 1985 5,920 4,610 840 1986 6,200 5,300 950 a/ Feed to the formerly JFI fertilizer plant at Wadi II, Aqaba. Source: JPMC 1986 Annual Report. 2.11 Mines. JPMC currently operate two open-pit mines, at El Hassa and El Abiad (IBRD Map Nos. 19920 and 19922) . Following recent upgrading of beneficiation plant facilities these mines have production design capacities of 4.1 mtpy (El Hasss) and 3.0 mtpy (El Abiad). Total production of phosphate rock in 1987 is expected to reach 6.7 mt, 4.0 mt from El Hassa and 2.7 mt from El Abiad. The mines essentially produce two grades of phosphate rock, Standard and Concentrate. The standard (S) grade--70/72 TCP1/--is obtained after simple screening and drying of the 1/ TCP (Tricalcium phosphate) is equivalent to 0.46 units of P205. -6- higher quality run-of-mine (ROM) ore and the concentrate (C) grade--73/75 TCP--is a washed product resulting from wet beneficiation itavolving removal of oversize, slimes and chlorine. Intermediate grades 71/73 and 72/74 can be produced by blending when market conditions favor those alternate products. The ratio of production of S to C grades is approximately 3:1 at El Hassa and 2:1 at El Abiad. 2.12 Mining at El Hassa and El Abiad has traditionally been by mobile mining equipment - trucks and shovels. JPMC has effectively employed local contractors extensively to supplement its own limited fleets of mobile equipment. A total of 48-49 million bank (in situ) cubic meters (BCM) of excavation, including 5 million BCM phosphate ore, is planned to yield the 6.7 mtpy of phosphate rock in 1987, corresponding to an overall stripping ratio of 9.6 m3 of overburden to 1 m3 of phosphate ore. In 1981, in order to reduce overburden excavation cost, JFMC procured a 30 m3 dragline (the first large dragline in the Middls East) and placed its operation in the hands of an international mining contractor. Dragline production, availability and utilization proved to be excellent. In 1983, JPMC took over the dragline and its operation is now comparable to any international standards for such equipmenc. On the basis of this experience, JPMC is procuring three additional draglines, one 30 m3 and two 15 m3, which will replace contract mining operations, thus reducing unit excavation costs. 2.13 Beneficiation. At El Hassa and El Abiad, ore is transported from the mining areas to crushing and screening stations by trucks and conveyor belts. Conveyor belts also connect the crushing stations with the beneficiation plants. All the facilities are well maintained. Screening oversize is rejected to waste stockpiles and undersize (70/72 grade) is dried to less than 2% moisture to produce S grade phosphates. Undersize (66/68 grade) is fed to log washers, slurrifiers and wet screens. Undersize from the wet screens is agitated, then fed to hydrocyclones where overflow (slimes) is rejected and underflow fed to filters to produce phosphate cake. Cake moisture is reduced to less than 2%, by drying, to produce 73/75 C grade concentrates. 2.14 Ore Reserves. JPMC has over 1 billion tonnes "proved" geological ore reserves and in excess of 1.7 billion tonnes "total" reserves. Total reserves are likely to increase as further exploration is undertaken at Shidiya in the 1987-89 period. Jordan - Phosphate Geological Ore Reserves (million tonnes) Area Proved Probable Possible Total Ruseifa 47 21 - 68 El Hassa 80 29 8 117 El Abiad 53 32 73 158 Shidiya 964 246 170 1,380 Totals 1,144 328 251 1,723 m - -7- 2.15 Not all the above reserves can be exploited profitably. Mining operations at Ruseifa have recently been discontinued and research is now planned to attempt to establish whether new and alternate beneficiation technology would enable the remaining reserves to be exploited economical- ly. At El Hassa and El Abiad, the limited remaining proven economically recoverable reserves (at stripping ratios less than 15:1 m3 overburden/m3 ROM ore) will enable planned production of 6.7 mtpy phosphate concentrates to continue only to 1991. Thereafter, production will gradually decline and the El Abiad mine will probably be exhausted in 1992 and El Hassa in 1997. 2.16 Total geological ore reserves at Shidiya exceed 1.3 billion tonnes, with the full lateral extent of the deposit not fully defined. The reserves at Shidiya are located in two areas, the Western Ore Body and the Eastern Ore Body. The proved reserves of 964 mt are primarily in the Western Ore Body and the probable reserves of 250 mt in the Eastern Ore Body. Proved reserves, following beneficiation, would yield approximately 400 mt of phosphate rock product (minitam 70/72 TCP), indicating a product- ion potential of 15-20 mtpy over a 20-25 year period. The Eastern Ore Body is considered to have an additional potential in excess of 5 mtpy over a similar period. The proposed project (production level of 1.5 mtpy for 20 years) would tap less t.han 5% of the potentially recoverable phosphate rock in the Western Ore Body. 2.17 Two other potential reserve areas have been identified by JPMC. First, the Wadi Taibe field, 60 kilometers north of Amman is estimated to contain at least 370 million tonnes phosphate rock in a single thick (10 m) bed. These reserves are not included in Jordan's reserve tabulation due to uncertainties regarding the economic viability of phosphate beneficiation. Second, an area of phosphate is known to exist adjacent to the Iraq border but little data is yet available about the extent and quality of the rock. 2.18 Research. JPMC has centralized the Company's research efforts at a research center adjacent to Ruseifa, north of Amman. Facilities include equipment and personnel to undertake mineralogical investigation, benefici- ation and phosphoric acid/fertilizer (bench and pilot plant scale) research. 2.19 Infrastructure. Water supply for potable and industrial use at El Hassa and El Abiad is tapped from wells and is more than adequate for plant requirements. Electric power is provided from the grid of the Jordan Electricity Authority (JEA), the state-owned electric company and power supply has not been a problem. Workshop and warehouse facilities at existing mines have recently been upgraded and provide a comprehensive maintenance and spare parts facillty that secures levels of equipment availability that are comparable to international open-pit mining standards. Materials managemert in warehouse facilities is manual but is efficiently handled by a well-organized cardex system. Warehouse space is made available for all manufacturers and suppliers of new mining equipment to make spare parts available on a three year "consignment" basis, following commissioning of new mining equipment. -8- 2. Fertilizer Unit 2.20 In 1981/82, JFI constructed a phosphate fertilizer plant at Wadi II, 6 km south-east of Aqaba. The plant was designed to produce 740,000 tpy Di-ammonium phosphate (DAP) and 56,000 tpyI/ phosphoric acid for export. Construction cost was estimated at US$300 million equivalent. During 1982, substantial (US$140 million) cost overruns were incurred. From the outset of operations, starting late 1982, plant operations were beset by technical difficulties and deficiencies, most of which were eliminated by 1986. By 1985, JFI was facing severe financial difficulties, mainly due to rapidly deteriorating international fertilizer prices and the high debt service. Following negotiation with shareholders (including IFC) the Government decided in 1986 to integrate JFI within the JPMC organiza- tion, and to compensate other shareholders, including IFC, at book value as of December 31, 1985. The Government, through a Special Fund for the Fertilizer Sector, took on part of the outstanding debt (about JD 65 million) under a special agreement. According to this agreement, future profit of the Fertilizer Unit will be allocated in full to the reimburse- ment of this debt, and after full reimbursement of this debt, 5% of profit will be paid to the Special Fund. JPMC purchased JFI fixed assets, current assets less current liabilities at book value for JD 60 million paid through the cancellation of JD 14 million of JFI commercial debts to JPMC; taking over JD 24 million of outstanding long-term debts, and JD 16 million of financial commitments to the Arab Bank (Saudi Arabia); and the payment to miscellaneous creditors of JD 6 million of JFI's short-term debts. 2.21 At full design capacity, the fertilizer plant was to consume 1.3 mtpy phosphate rock from the El Hassa and El Abiad mining operations, however, it is not likely that the plant can exceed 85% of design capacity, which is satisfactory in the Jordanian context. Hence, the plant's actual phosphate rock consumption is not expected to exceed 1.; mtpy. The plant was designed to be fed with 73/75 grade rock. Following initial operation difficulties, the rock feed was adjusted to a mix of 70/72 and 73/75 grades. JPMC is now investigating the possibility of supplying the plant with lower grade phosphate rock-either dust/slimes to be collected at the mines, or 66/68, or other sub-commercial grades. The supply of sub- commercial phosphate grades, if technically feasible, will on the one hand, lower the output of the plant, increase sulphur consumption and therefore increase unit production costs, but on the other hand, "free' higher grade phosphate to the export market. A study on the technical feasibility and financial attractiveness of this possibility is to be financed under the proposed Project (para. 4.25). 2.22. Following the reorganization of the Fertilizer Unit, its management is satisfactory, and maintenance tasks are performed as scheduled. The Fertilizer Unit's technical department was able in 1986 to resolve most of its cooling and filtration problems, which permitted a 2/ In tonnes of P205. -9- sizeable improvement in the unit production capacity. Further improvement was carried out in 1987 and will be reflected in 1987 production statistics. E. Accounting Arrangements and Audit 2.23 JPMC's accounts are satisfactorily kept, although t1} accounting systems and procedures of the Mining and Fertilizer Units are still not fully compatible, creating a problem for financial consolidation. A common system is expected to be in effect by December 1987. The Company's accounting staff is qualified and book-keeping is efficient: JPMC produces a full set of financial statements every quarter, and the unaudited annual financial statements are available two months after the end of each fiscal year. The company's accounts are audited every semester by qualified external private auditors applying internationally accepted standards. During negotiations, assurances were obtained that JPMC would continue to keep separate accounts for the Mining and Fertilizer Units in addition to consolidated accounts at the company level; and that JPMC would provide the Bank with audited financial statements within six months of the close of each fiscal year. III. THE MARKET FOR PHOSPHATE ROCK AND PHOSPHATE FERTILIZERS 3.01. The proposed Project will increase Jordan's export capacity by 1.5 mtpy, representing only 2.7% of 1990 phosphate rock world trade and less than 1% of world production. This additional production will be absorbed by the expanding Asian and Far Eastern markets, and replace production from depleting mines in the Oceania area. In the fertilizer sector, JPMC will not increase its capacity, and its world market share will gradually decline. Phosphate rock prices and fertilizer prikee are both forecast to recover slightly from their present depressed level. Under these prudent assumptions, marketing does not present a major risk for the Project or JPMC as a company, as the analysis in this chapter will show. 3.02 The phosphate world market affects the Project in three ways. First, the additional 1.5 mtpy phosphate rock production from the Project must be readily marketable without disrupting the world phosphate rock export market and without excessive risk. Second, the future phosphate rock market affects directly the economic justification of the project through forecasted rock prices, and third, future fertilizer and rock prices and demand affect JPMC's future financial position and viability. Detailed analysis on world supply/demand for phusphate fertilizers and rock, main producar's strategy and market shares are available in the Project File. A. Phosphate Fertilizer World Demand/Supply 3.03 World phosphate fertilizer supply/demand growth is projected to be slower (3.5% p.a.) than the past 15 years (3.7% p.a.), because of the depressed world food market and excess fertilizer supply capacity. -10- However, most of the demand and supply increases will take place in Asia, where Jordan enjoys a particularly competitive position for phosphate fertilizer exports (which depends on world demand) and phosphate rock exports (which depends on world supply). In the past, world demand for phosphate fertilizers increased by an average 3.7% p.a. over the 1970-85 period. However, the demand growth had sharp regiona: variations. The higher growth rates were in Eastern Europe (4.8% p.a.) and in developing countries (8.5% p.a.), mainly Asia (10.7% p.a.) and Africa (6.0% p.a.), while the demand from developed countries remained stagnant Annex 3-1). Jordan - World Supply/Demand for Phosphate Fertilizer (in million tonnes P205) Average Growth Rate 1970 1980 1985 1986 1990 2000 1986-2000 - Demand West and South Europe 5.0 6.1 5.4 5.3 5.5 5.5 0.3 Eastern Europe 4.8 8.6 9.7 10.0 10.0 13.4 2,1 Far East 1.6 4.6 6.4 6.5 9.5 14.8 6.1 Africa 0.5 1.0 1.2 1.1 1.7 2.4 5.7 Total World Demand 19.8 30.8 34.3 33.0 38.3 57.2 3.2 Production Capacity Total World Production Capacity 20.6 33.0 37.1 37.0 40.9 52.6 2.5 3.04 World phosphate fertilizer supply capacity matched closely the demand until mid-1970. The 1974 price boom (para. 3.12) induced phosphate fertilizer producers to increase their production capacity: the world production capacity nearly doubled over the 1970-85 period, and exceeded the demand growth of the late 1970's/early 1980's, resulting in an estimated 4 mt production over capacity (12% of actual demand). 3.05 According to Bank forecasts, future world demand for P205 (phosphate nutrient) will continue to increase at a moderate rate of 3.0% p.a. between 1986 and 1990 and 3.4% p.a. over the 1986-2000 period, depending mainly on future world grain production and prices, crop response to fertilizers, and solvency of demand (farm credit and fore.gn exchange availability). Demand growth will originate mainly from Asia, Latin America and Eastern Europe. The demand from developed countries 4s not likely to increase significantly. World supply growth, on the other hand, will slow down, allowing supply over-capacity to be gradually reduced and to disappear by 1995. No new plant construction is expected to be undertaken at least until the early 1990's, as market prices are below the full production cost of new plants; but existing plants' utilization rate -11- will gradually increase, some 'mothballed" units may be re-commissioned when rising prices exceed these units' marginal production cost. Also, production facilities already under construction will come on stream early 1990's (Tunisia, India, and Morocco). Future &upply is anticipated to increase at 2.5% p.a. over the 1986-2000 period. 3.06 The world phosphate fertilizer supply growth (which affects JPMC's Mining Unit export potential) is concentrated in regions where Jordan enjoys a favorable geographical location, with lower freight rates than its potential competitors. The world phosphate fertilizer demand (which affects JPMC's Fertilizer Unit's export potential) is concentrated in the same region, where Jordan has a comparative geographical advantage (Annex 3-1). B. World Phosphate Rock Supply 3.07 Phosphate rock supply growth is projected to be lower than in the 1970-85 period, due to the lower growth of phosphate fertilizer supply (para. 3.03). The 1986-2000 production increase will take place in regions (Morocco, Togo, and China for domestic use) which do not compete with Jordan or JPMC's export market (mainly Asia). Over the period 1970-85, world production of phosphate rock increased by an average 4.3% p.a., mainly from Jordan (11% p.a.), Morocco (5% p.a.), Togo (4X p.a.), and China (4% p.a.). Jordan - World Phosphate Rock Prouction (In miflin tons of rock 70% TCP) AverW Growth Rate 1970 1980 1985 1986 1990 1995 2000 1985--200 Western Countries 35.1 52.5 50.1 47.2 54.7 58.7 62.1 1.4 stebrnfEurope 17.6 25.0 33.0 33.1 35.5 38.0 41.8 1.6 Asia 3.4 15.9 21.8 22.6 25.2 30.0 35.4 3.3 Africa 19.5 33.3 34.3 33.8 40.1 51.0 62.4 4.1 Ooeia 3.5 3.4 2.7 2.7 2.4 1.0 1.0 (6.5) Otbur 1.7 5.3 8.1 9.0 9.5 12.3 12.9 0.6 Total World Prodtmctic 80.8 135.4 150.0 148.4 167.4 191.0 215.6 2.4 3.08 In the future, phosphate rock production is estimated, according to the Bank's International Economic Department (IRC) projection (Annex 3-2), to increase at a lower rate of 2.4% p.a. over the 1985-2000 period. In North America, high production costs of potential new producers is likely to prevent the opening of new mines, as long as prices remain at their present low level. Depletion of existing reserves and the possible closures of high cost marginal mines may reduce overall supply capacity by about 2% p.a. after 1995. In Oceania, phosphate reserves will be depleted by 1995-97, reducing supply by about 1.7 mtpy. -12- 3.09 On the other hand, production from low cost mines is expected to increase in certain countries. In addition to the proposed 1.5 mtpy project in Jordan: (i) In Morocco, ongoing projects are expected to increase rock production capacity by about 10 mtpy by 1995; (ii) In Eastern Europe (mainly the USSR), production capacity of existing mines is expected to increase by some 5 mtpy by 1995; (iii) In Latin America (Brazil, Mexico and Peru), production capacity is expected to increase by 2 mtpy by 1995; (iv) In China, output is expected to increase by 2 mtpy by 1995; and (v) In Israel, a 1.6 mtpy production capacity increase is expected. JPMC's envisaged 1.5 mtpy production increase after 1989 represents less than 1Z of total world production and less than 14% of the 1986-89 annual world production increase, and will not present a substantial threat to existing rock producers. C. Phosphate Rock Supply/Demand Balance and World Trade 3.10 Jordan's potential export market depends on the international market for phosphate rock, and on the relative geographical location of rock producers and rock processing chemical plants. In the pa3t, the long-term trend was toward processing phosphate rock in rock producing or sulphur producing countries, because of potential saving on transport cost and the desire of input producing countries to increase the value added content of their exports. This was the case in Tunisia, Morocco, Jordan and some Gulf countries. This trend is expected to continue in the long-run, but low fertilizer prices in the medium-term is expected to provide incentives for exports of rock rather than fertilizer. However, the tendency toward local processing is reflected in the difference between projected phosphate rock consumption growth rate over the 1985-2000 period (2.4% p.a.) and the expected growth rate of phosphate rock international trade (1.9% p.a. only). The resulting future trade of phosphate rock is described in detail in Annex 3-3 and summarized on the following page. -13- Jordan - World Phosphate Rock Trade 1975-2000 (702 TPC equivalent, million tonnes) Average 1985-2000 1975 1980 1983 1990 1995 2000 Annual Growth Rate _() EEC Import 11.3 14.5 14.4 15.3 15.3 15.3 0.4 Export - - - - - - - Asia Import 4.5 7.1 9.4 11.3 12.0 13.6 2.4 Export 2.9 6.3 7.8 10.7 12.2 13.6 3.8 North Africa Import - - - - - - - Export 15.1 17.7 16.6 21.5 24.1 26.2 3.0 Oceania Import 2.9 3.5 2.7 2.9 2.8 2.8 0.2 Export 2.1 2.1 2.7 2.8 0.2 0.0 N.A East Europe Import 9.0 10.0 10.8 13.2 15.3 17.9 3.4 Export 6.1 4.7 3.9 3.8 3.2 3.2 (1.4) South Europe Import 6.1 5.3 5.7 6.5 6.6 6.7 1.0 Export - - - - - - - Other a/ Import 5.2 5.6 5.4 6.0 7.1 8.2 2.8 Export 12.8 15.2 17.4 16.4 19.4 21.5 1.4 Total World Trade 39.0 46.0 48.4 55.2 59.1 64.5 1.9 a/ Includes Regions not directly relevant to Jordan phosphate trade: North America, South America and Togo. Source: World Bank staff estimate, and lAO Fertilizer Yearbook. 3.11 Phosphate rock international trade is expected to increase at a lower rate than in the past. However, world trade will increase by 14 million tonnes from 1985 to 2000. The most promising export markets for Jordan are in Asia (India, China, Indonesia) with a 4 mtpy additional import potential and a high growth rate of 2.42 p.a., and East Europe with a 7 mtpy additional Import potential and also a high 3.4% p.a. import growth rate. Some additional demand for Jordan rock may come from Mediterranean countries. Jordan's market share is analyzed in para. 3.15 below. D. Phosphate Rock and Fertilizer Prices 3.12 Present phosphate fertilizer (DAP) and rock prices are at their lowest level since 1974, because of the market excess supply situation (paras. 3.04 and 3.07). However, future real prices are not forecast to increase by more than 102 over the 1987-2000 period, because the excess -14- supply will be absorbed by the slowly increasing demand only in the early 19909, and some additional production capacity will come onstream after 1990. The anticipated price increase will take place between 1987 and 1990 for DAP and after 1989-90 for phosphate rock. 3.13 Phosphate Rock Prices. World market prices for phosphate rock over the 1965-86 period were on a long-term declining trend, except during the 1974-80 boom period (Annex 3-4). In the past, long-term floor prices were determined by production costs in the USA, which is the world's largest producer, and fluctuations above this level were determined by the supply-demand balance. 3.14 In the recent past, nominal prices increased slightly in the last quarter of 1986, but by April 1987, they had dropped back to their early 1986 level, and it is doubtful that they will increase in the short-run. In the future, real prices are expected to continue to fall slightly until 1989, due to the existing oversupply which will prevail until 1990-91. Thereafter, long-term production cost is expected to increase moderately driving prices up to their 1985 level in real terms, by the year 2000. The resulting prices are summarized below. Jordanian average rock prices have been consistently (US$2-3 per tonne) above the Moroccan or USA FOB prices, because of the higher quality of most of the Jordanian rock. Jordanian rock contains less impurities and requires less sulphuric acid per tonne of rock for the production of phosphoric acid. The estimated savings for the fertilizer producer is about US$3 per tonne of rock. In 1986, average prices for Jordanian rock were US$30 for 70/72 TCP quality, and US$36 for 73/75 TCP quality. Jordan - Phosphate Rock World Prices, 70% TCP (1986 Constant US$/tonne, MUV Deflator) 1985 1986 1987 1988 1989 1990 1995 2000 Price FOB Casablanca 34.0 28.6 28.3 29.9 29.6 31.1 33.3 35.8 Source: Mission estimates based on the Bank's International Economic Department's (IEC) projections. 3.15 Fertilizer Prices. World market prices for phosphate fertilizer in 1986, were at their lowest level in real terms in the post World War II period (Annex 3-4). The market depression is due to the flat or declining USA and West European fertilizer consumption. DAP prices reached a low of about US$140 in December 1986, but recovered to US$180 in February 1987 to drop back to $150 by March 1987. Since March 1987, prices have gone up to US$190 per tonne. This increase, combined with a substantially higher demand, may be the beginning of the long awaited price recovery. In the short-run, DAP prices are expected to recover slightly in real terms because 1986 prices are clearly below cash production costs even for efficient producers. In the longer run, DAP prices are expected to stabilize in real terms at their 1985 level, which is close to the marginal producers' long-term marginal cost. -15- E. The Market for Jordanian Phosphate Rock and Fertilizer 3.16 Phosphate Rock. In the past, Jordan pursued an aggressive phosphate rock marketing strategy based on competitive pricing and utiliza- tion of government-to-government agreements (Annex 3-5). Its world market share has increased from 4.7% In 1978 to 10.4% in 1986, with exports increasing at an average annual rate of 11.6% p.a., despite a depressed world market. Domestic consumption in the fertilizer plant at Aqaba was about I mtpy and will remain at that level in the future. Jordan - Phosphate Rock Export and Market Share - 1978-86 Average Annual 1978 1981 1983 1984 1985 1986 Growth Rate Jordan Exports ('000 tonnes) 2160 3520 3700 4699 4610 5117 11.6 Jordan Market Share (%) 4.2 7.7 8.0 9.8 10.0 10.4 - This impressive performance was achieved mainly in the Asian market (India, Indonesia, Japan and Taiwan), the East European market (Poland, Romania and Yugoslavia) and to a lesser extent, the West European market (France and Turkey). Jordan's marketing effort has concentrated on markets where Jordan has a comparative freight advantage, and was served by a flexible pricing strategy. JPMC shared Jordan's freight advantage with the client to be competitive with the CIF price of the best located competitor. Compared to its major competitors (M4orocco and Tunisia), Jordan has a freight advantage of about US$6 per tonne for India and Far East markets, and small disadvantage (US$1 per tonne) for deliveries to Odessa, East and West Europe. Jordan's strategy was also supported by a flexible approach regarding countertrade and barter agreements which are, however, limited to the purchase of JPKC major inputs (sulphur, ammonia) equipment, and consum- ables. Also, the Jordan Government supports financial participation by Jordanian companies in fertilizer companies abroad to establish preferred trade channels. 3.17 Based on the 1986 market share situation, and allocating future demand increases country-by-country to the least cost potential supplier, future potential demand for Jordanian rock is expected to be strong because (i) the markets where Jordan has a clear competitive advantage are develop- ing rapidly (Asia--mainly India, Pakistan and Bangladesh, the Par East, and to a lesser extent Eastern Europe), and (ii) Jordan can continue to pursue a low-price policy without jeopardizing the phosphate company's financial situation. 3.18 Over the 1985-95 period, Jordan's market shares are likely to remain constant in the East European market (13% to 14%), and increase substantially in the Asian market (28%-35%) and in the Oceania market (3% to 37%). The substantial gain in market shares will be partly due to -16- replacement of depleted Nauru and Christmas Islands mines. As a result, JPMC's potential additional demand, compared to 1985, will exceed 2.5 mtpy by 1990; 4 mtpy by 1995, and 6 mtpy by 2000. Under this scenario, Jordan's competitors would still be able to market their planne' phosphate rock production (Annex 3-3). Under these projections, the marketing of the additioaal 1.5 mtpy production of the proposed project is not anticipated to present special difficulties or risks and will not disrupt the international phosphate rock market. In an alternative "low case" scenario, Jordan would concentrate on the more profitable Asian and Far East markets, maintaining its share in most East European, Mediterranean, and West European markets. Under this scenario, the additional demand available to Jordan would be 2 mtpy in 1990, 3.7 mtpy in 1995 and 4.1 mtpy in 2000. Jordan - Potential Market and Export Targets (million tonnes) 1985 1990 1995 2000 Jordan Potential Market, Best Estimated Scenario 4.6 7.1 8.5 9.4 Jordan Potential Market, Low Scenario 4.6 6.6 8.3 8.7 JPMC Export Targets 4.6 7.1 8.0 8.6 3.19 Phosphate Fertilizer. JPMC's sales of fertilizers are limited by the chemical complex production capacity. The company has an aggressive pricing policy, and has successfully marketed 580,000 tonnes of DAP and 30,000 tonnes of phosphoric acid in 1986 (Annex 3-6). In 1987, sales are planned to at least reach 650,000 tonnes of DAP, and 20,000 tonnes of Phosphoric Acid, and this target is likely to be achieved, based on sales results for the first semester of 1987. JPMC phosphate fertilizer exports represented about 7% of world phosphate trade. Its production capacity is limited to 650,000 tonnes of DAP. On the other hand, world trade of phosphate fertilizer is expected, according to IEC's projection, to increase at about 3.4% p.a. over the 1986-2000 period. Therefore, JPMC 's market share will gradually decline from 7% to 5.8% in 1995 and 4.9X in the year 2000. The marketing of 650,000 tonnes of DAP per annun in the future is not anticipated to create substantial problems to JPMC. IV. THE PROJECT - SHIDIYA PHOSPHATE MINE A. ProJect Objectives 4.01 The proposed project is a first step in the development of the Shidiya phosphate deposit which within the next decade will become Jordan's only productive mining area, as phosphate reserves at existing mines become exhausted, and will provide a foundation for future expansions at Shidiya. 4.02 The Project's primary objective is to increase phosphate rock production by 1.5 mtpy by 0989, thus increasing phosphate rock exports to a -17- level in excess of 7 stpy. Streamlining of existing mining and downstream chemical fertilizer operations will be achieved through accelerated research (paras. 4.25 and 4.26) and the improved viability of the restructured phosphate sector will be secured. Dust control technology will be upgraded at Aqaba port to internationally acceptable environmental standards (paras. 4.22-4.23). The project's technical assistance component will, inter alia, assist JPMC to define the appropriate scope and economic configuration of future mine and beneficiation development phases at Shidiya to ensure optimal sector development (para. 4.26). B. Phasing of Mine Development and Sector Strategy 4.03 Through research and physical investigation that will be undertaken as an integral part of the Project (para. 4.26), the economics of expanding production at Shidiya to 3.0 mtpy under a second stage development at the project area will be identified. The implementation of future developments would lift exports to a level of 8.0 mtpy in 1994. Beyond 1991, the production level of 6.7 mtpy from El Hassa/El Abiad cannot be maintained due to limited economically recoverable reserves and production from El Abiad will probably cease in 1992 and from El Hassa in 1997. The phosphate rock sector strategy, of which the proposed project is a foundation, will compensate for the progressive loss of production from El Hassa and El Abiad mines by the implementation of further production areas in the Western and Eastern Shidiya deposits and will phase these developments in such a manner as to maintain the export level of 7.1 stpy to 1992 and to increase the export level to 8.0 mtpy in 1994 and maintain that level through the year 2000. This strategy is presented in tabular form in Annex 4-1. C. Prolect DescriRtion 4.04 The principal features of the proposed project are: (i) procurement and commissioning of equipment to develop an open-pit mine with a production design capacity of 1.5 mtpy consisting of: two 20 m3 draglines, six 5.5-7.0 mJ hydraulic excavators, twenty-two 50T dump trucks, four 5.3 i3 loaders, four bulldozers, two graders, eight blasthole drills; (ii) procurement and installation of equipment for a dry beneficiation plant consisting of screening, storage and handling facilities; (iii) construction of supporting infrastructure including an access road, power facilities, water supply, workshops, warehouses and offices to serve the mine and plant; (iv) construction of a mine townsite with necessary utilities; (v) technical assistance including overseas study tours and seminars relating to (a) phosphate dust and slimes recovery; (b) beneficiation research and technology; and (c) accounting, finance and corporate planning; and -18- (vi) procurement and installation of dust ext.actors/collectors and monitoring devices at Aqaba port, and at the mines. D. Detailed Features 1. Mine Development 4.05 Location. The Shidiya deposit is located in the south of Jordan, approximately 50 kms south-east of the city of Ma'an and 120 kms north-east of the port of Aqaba (Map IBRD 19920), the export outlet for Jordan's phosphate concentrates are exported and through which project rock will be exported. The terrain is flat at about 900 m above sea level being part of the Shidlya Plateau and is separated from the sea (Aqaba Gulf) by a mountain range rising above 1,500 m. The project site is abouc 20 kms east of the road leading from ma'an to Mudawwarah (adjacent to the Saudi Arabia border) and about 25 kms east of the existing narrow gauge railway which is used for transporting part of the production from the existing El Hassa/El Abiad phosphate mines to the port of Aqaba (para. 5.01). The Jordan climate is semi-arid with average daily temperatures of 33C, May through October, and 12C, November through April. The climate is typical of desert conditions in the region with low annual rainfall (average 50mm) but with occasional heavy showers reaching 50mm per hour. Humidity is normally low. The project area and its environs are uninhabitated and free of vegetation and water courses. 4.06 Geology. Reserves and Ore Quality. The geology of the Shidiya area was first investigated in 1969-74 by the National Resources Authority. Detailed drilling by JPMC over the period 1975-86 identified contiguous phosphate bearing areas and a total geological ore reserve in excess of 1 billion tonnes of phosphate. Jordan - Shidiva Ore Body - Ore Reserves (million tonnes) Ore Bodv Proved Probable Possible Total Western 744 - 744 Eastern 220 100 - 320 South/East area - 146 170 316 Total 964 246 170 1,380 SO m Ongoing exploration will probably increase these reserves substantially particularly in the Eastern and South/East areas. 4.07 Exploration has been concentrated in the Western Ore Body, which is considered geologically and economically most amenrible to mining. The optimal project area for production of 1.5 mtpy phosphate rock for a minimum 20 years has been defined as an area of approximately 16.2 sq kis within the Western Ore Body and contains 237.4 mt in-situ phosphate ore reserves i.e., 32% of the Western Ore Body and 17.5% of the overall Shidiya reserves (as identified at January 1987). -19- 4.08 A generalized vertical geological cross-sectlon of strata in the project area is presented in Annex 4-2. Four beds of phosphate, AO, Al, A2 and A3 exist at individual average thicknesses varying from 0.8 to 1.9m to a maximum depth of approximately 20 meters. The beds dip very gently to the north. The main phosphate sequence (beds Al, A2 and A3) is overlain by alluvium, marl and coquina limestone, averaging a total of 13.4 m thickness (including AO bed). The phosphate beds Al, A2 and A3 are separated by interwastes. The inZ itV vertical ratio of overburden and interwaste to phosphate ore is 3:lm Ira 4.09 Mine Development. Feasibility study work undertaken by a French consulting consortium led by Sofreatnes and subsequent feasibility work carried out by JPMC has shown that bed A2 can be marketed as 73/75 grade after simple and low cost "dry" screening, whereas the other phosphate beds (AO, Al and A3) will require "wet" beneficiation (washing and/or flotation) and drying to produce commercially marketable products of similar grade. The economics of recovering the lower grade phosphate (AO, Al and A3) beds by "wet" beneficiation, bearing in mind the low (37-43%) level of TCP recovery mainly attributable to the large screening (oversize) losses (tabulated below) requires further investigation, which has been initiated by JPMC. Jordan - Shidiya Project - Phosphate Product_Quantities and Grades Bed Beneficiation Ore X Recovery Rock Product -(t ROM) Rt TCP mt TCP A2 Dry Screening 42.9 78 83 33.5 73-75 AO Flotati.on 29.5 20 43 5.9 74 Al Washing 38.2 25 37 9.6 70 Al Flotation 30.0 24 40 7.2 75-76 A3 Flotation 44.7 29 42 12.9 75 4.10 The Project entails the mining and dry screening of bed A2 only to produce 1.5 mtpy (73-75 TCP) rock product. Reserves are adequate for a mine life of 20 years. Overburden removal per year ranges up to 11.0-11.5 million BCM. 4.11 Feasibility work has determined that the geometry of the 16.2 sq.km project area is simple, being typified by uniformly shallow overburden and relatively flat phosphate beds. This makes overburden removal suitable for dragline operation, one of the lowest cost mine excavation methods available. Optimal dragline configuration will include two units with a 75 m boom and 24 m3 bucket with an effective excavation capacity of 12 million BCM per year. Dragline excavation down to the top of bed Al will include rejection of bed AO to waste. Beds Al and underlying interwaste and phosphate beds will be removed by a shovel/truck system. This would consist of six 5.5-7.0 m hydraulic e cavators and a fleet of twenty-two 50T trucks complemented by four 5.3 a loaders. Other equipment such as bulldozers, graders, water trucks and maintenance trucks will support the main mining equipment. Beds Al and A3 will be stockpiled -20- until the economics of beneficiation of such lower grade beds has been established. Research is underway and should be completed in 1988 to allow definition of the economics of a second stage development of Shidiya which could encompass beneficiation of AO, Al and A3. 4.12 The 'box cut" area to open up the mine will form a central north-south corridor through the center of the project area and will be 4.4 kus in length, 175 m wide and 20 m deep, to intersect all phosphate beds. This facilitates optimal pit bottom development to accommodate truck loading, dragline waste piles and a central paved haul-road. Total "box cut" excavation is approximately 20 million BCM and will be undertaken by JPMC truck-shovel equipment from existing mines until mid-1988 when project mobile equipment is commissioned. Following commissioning of draglines in mid-1989, the project area will be mined on a quadrant basis to produce a uniform rock product quality. 2. Beneficiation Plant 4.13 The proposed millsite (baneficiation plant) will be located immediately west of the project mining area. Run-of-mine phosphate ore will be transported an average 3.5 kms out of the open-pit by 50 T truck to a vibrating screening plant (600 tph capacity) to separate high grade -12mm undersize (73.7X TCP) from +12mm oversize (49.2% TCP). Oversize will be discarded and transported to waste dumps by 50 T truck. Undersize will be transported by 50 T trucks to a stockpile and/or to load out (500 T) bins at a truck loading terminal. The truck loading terminal will be built as a steel structure with 3x500 t capacity bins equipped with truck loading chutes (450 tph capacity per chute). A 70,000 T open storage facility with concrete floor and retaining walls will provide a 15 day inventory of finished product at the mine site area. Phosphate rock production is expected to be 0.8 mt in 1988 and 1.5 mtpy in 1989 and thereafter. 3. Infrastructure Development 4.14 Road. The project area will be connected to the Ma'an-Saudi Arabia highway, 30 kms from the mine area, by a mine access road. Construction of the access road is underway and is scheduled to be completed by the end of 1988. JPMC will contract trucks to transport phosphate from Shidiya to Aqaba, due to rail capacity limitations (para 5.01). Agreement was reached, during negotiations, that the Government will cause the Ministry of Public Works to complete construction of the road by December 31, 1988. 4.15 Electricity Supply. JEA is currently installing, a 70 km, 132 kv double circuit transmission line to Shidiya and will modify the main substation at Ma'an and construct a 132/33/11 kv substation adjacent to the beneficiation plant at Shidiya. Construction is expected to be completed by the end of 1988. Tha cost of this work will be borne equally between JEA/JPMC. Agreement was reached, during negotiations, that the Government will cause JKA to finance its share of these costs and to carry out the construction of the transmission line and substation by December 31, 1988. Internal power distribution facilities (8x33kv feeder lines, -21- switchgear and control/monitoring facilities) will connect the Shidiya sub-station to the draglines, beneficiation olant, townsite and workshops. 4.16 Water SUpPlY. The total water requirement of the project is estimated at 20m /hr for industrial and domestic use. Three production wells have been drilled by JPMC, 20-25 kms north of the project area, intersecting the main regional aquifer i Ientified during feasibility work. The wells have an average yield of 100 a /hr eacn and are already being utilized in a limited manner for the existing m'.ne camp. Two of the wells will be utilized for the project. An elevated storage reservoir will be constructed near the beneficiation plant and townsite. Water analyses performed by the National Resource Authority have indicated that the water is in general acceptable for all purposes, but JPMC will treat water for domestic use in accordance with World Health Organization standards. Agreement was reached during negotiations, that a condition of loan effectiveness will be that the Government has transferred all necessary water and land rights for water production wells and water lines to JPMC. 4.17 Townsite. The proposed townsite comrises 252 housing units, 132 of 61 m2 living area (type A2) and 120 of 89 m living area (type A3). The location is immediately west of the proposed millsite to facilitate immediate access to the project area. The townsite area includes restaurants, a shopping center, healtn clinic, mosque, guest house (350 m2) and two managers' houses (150 m2 each). Type A3 houses are two bedrooms (with kitchenette, bathroom and sitting room) and would house four bachelors and type A2 is essentially the same unit but one bedroom to accommodate two bachelors. In the interests of economy, the layout has been adjusted, following Bank recommendations, to better fit an overall longer-term development plan, to reduce land use for roads, parking areas, and to minimize cost of townsite infrastructure (electricity and sewage). 4. Manpower 4.18 The manpower requirement of the project at design capacity of 1.5 mtpy phosphate rock product will be 750. Full details of the organization structure for project implementation and construction and job categories/personnel required are shown in Annex 4-3. Substantial on-the-job training is already in hand at the existing El Hassa/El Abiad mines to prepare for skilled/semi-skilled requirements of the Shidiya project starting 1988. Graduates from existing training schools and poly- technics will also be utilized as trainees in the new project. Additional management staff have been introduced at the existing mines in recent years to prepare for transfer to the project at start-up. In addition, JPMC has developed a computer listing of more than 1,000 qualified machine operators and electrical/mechanical personnel, many of whom have recently returned to Jordan from Gulf States, and all of whom have expressed interest in gaining employment in the expanding Company. The technology to be used in the mine and beneficiation plant at Shidiya is very similar to that traditionally found in existing JPMC mines and as a consequence, no new training or recruitment practices need to be instituted. -22- 5. IScolox 4.19 Shidiva Mine Site. No serious environmental hazards will result from the mine development. The Shidiya deposit is located in a barren desert region which is devoid of population, vegetation and water courses. Ths project area occupies only 16.2 sq.km in the Rabe-El-Hali (the Empty Quarter) which extends into the Saudi Arabia desert covering many thousand square kilometers. The area is traversed periodically by nomadic tribes and their sheep herds and project development will provide a source of water and supplies to tribes people and a source of possible employment. Wildlife in the project area is almost non-existent. In the environs of the project area, occasional rabbits have been sited and falcons are known to fly over the general area during annual migration. Dust will be generated, as in any open-pit mining operation during excavation and in-pit dumping by dragline but much of the airborne dust will be contained below groutI level and within the excavation area and its immediate environs. Major dust generation resulting from truck haulage out of pit will be contained by repeated water spraying. Dust emission at the screening plant will be collected in dry cyclones which will be procured as a part of the screening plant equipment. 4.20 Aqaba Port. Emissions of phosphate dust at the phosphate receiving, storage and loading facilities at Aqaba (paras. 5.05-5.09) are at serious levels and are environmentally unacceptable. Phosphate rock is crushed, beneficiated and dried at the existing mines and arrives at the port in a dry and dusty condition with a high content of fines. Opportunity exists for thc.. generation of airborne phosphate dust and a considerable quanitity of dust is released during the loading/unloading cycles. The Government and concerned authorities have indicated a total commitment to the resolution of this issue. 4.21 The relatively high portion of phosphate fines handled at Aqaba port and that becomes airborne, is not only a serious environmental issue, but also represents a commercial loss to JPMC. Collection of substantial amounts of phosphate fines at the port by additional dust collection devices would present a disposal problem. If such material were loaded onto ships for export, the environmental problem would simply be transferred to JPMC's customers at the point of unloading and would create technological problems at the processing end. Disposal of substantial amounts of the fine phosphate inland from the port would present logistical, economic and environmental problems. 4.22 Recognizing these issues and particularly the environmental problem at Aqaba and its environs, JPMC have initiated a program to 'dedust' the phosphate at all mines and to confirm the feasibility of utilizing the phosphate fines in its chemical plant at Wadi II. This program has two essential advantages: (i) phosphate fine material would be collected at the mines thus substantially reducing the fine content of rock arriving at the port and substantially reducing dust pollution; and -23- (ii) the high grade phosphate currently fed to the chemical plant would be freed for export, thus improving the financial position of JPMC and increasing the industry's economic yield. The program has a series of phases. Firstly, JPMC has recently completed development of a pilot plant facility at its research center at Ruseifa (para 2.18) to fully assess the utilization of fines in the chemical plant. This testing was started December 1987, and is scheduled to be completed by March 30, 1988. Following this work, industrial tests will be undertaken at the chemical plant starting April 30, 1988, and will be completed by August 30, 1988. Dust removal technology, the introduction of which was started at dryers at existing mines in September 1986, will be completed, including installations at the Shidiya project site, by September 30, 1989. The final phase of the program starting October 1989, will tnvolve the introduction of plants to remove phosphate slimes at exiating mines and in parallel, detail engineering and implementation of modifications at the chemical plant. Start-up of full dedusting/desliming and utilization of fine phosphate at the chemical plant is scheduled for late 1990. 4.23 Prior to negotiations, the Bank gave its full support to the above program, recognizing that not only would it lead to a more optimal economic configuration of the phosphate industry in Jordan, but also that it would lead to a considerable reduction in dust pollution, thus addressing the serious environmental issue. However, the implementation of the program will not be completed until late 1990 and, in addition, JPMC appreciate that phosphate, being a friable material, will break down during loading/unloading, thus necessitating eventual upgrading of dedusting equipment within the port area. As a consequence and to better address the environmental issue in the short-term, agreement was reached during negotiations that JPMC will (i) immediately initiate monitoring of phosphate dust emission at Aqaba; (ii) submit to the Bank for review and comment, a report on monitoring activities by August 31, 1988; (iii) provide to the Bank for review and comment, preliminary specifications for dust removal equipment to be installed at the port by August 31, 1988; (iv) take all action required to ensure that phosphate loading/unloading operations are conducted with due regard to public health and the preservation of the environment, and reduce dust emissions to environmentally acceptable levels (annual geometric mean less than 70 micrograms/m n above local background level and maximum 24 hourly concentration less than 5 x annual geometric mean of local background dust level) by December 31, 1990; and (v) promptly allocate all appropriate funds as required to acquire and install at Aqaba, equipment for dust pollution and extraction to maintain the standards at (iv) above. Procurement of the dust removal equipment will commence not later than December 31, 1988, and will be installed not later than June 30, 1989. The collection, separation, transportation and disposal of dust fines will be undertaken in a manner satisfactory to the Bank. -24- 6. Technical Assistance 4.24 JPMC has extensive experience in construction management and implementation, including well established scheduling, monitoring and cost control procedures. The technical assistance component of the project is limited to individuals and small groups of consultants that JPHC will hire to (i) help orientate physical research relating to fines and slimes recovery and their potential utilization at the fertilizer plant at Aqaba and to upgrade beneficiation technology; and (ii) upgrade corporate planning, finance, and internal audit functions. In addition to hiring consultants, overseas study tours and seminars in Jordan will be included in the technical assistance program. Agreement was reached with JPMC, during negotiations, that plans for technical assistance will be prepared and submitted to the Bank by end-PY88 and that hiring consultants will commence by mid-FY89. 4.25 Dust and Slimes Recovery and Utilization. Rock drying facilities at existing mines and associated beneficiation plants produce substantial quantities of dust and slimes, respectively, which are currently discarded as nonrecoverable waste products. JPMC recognizes that dust/slimes recovery could improve the export quality of phosphate rock, produce additional export grade rock and could provide a potential feed to the fertilizer plant at Aqaba, freeing higher grade rock for export. Extensive testing and research are planned by JPHC, who recognizes the need for technical assistance to help orientate, implement and analyze the work program. The foreign cost of this component of the technical assistance program is estimated at US$106,000 for 4 man-months @ US$14,000 per man-month plus US$ 20,000 for travel and subsistence, US$30,000 for pilot plant test equipment rental and overseas sample shipment and testing. 4.26 Beneficiation. JPMC recognizes that development of Shidiya beyond a production level of 1.5 mtpy, (following simple dry treatment), will involve the construction and operation of high cost "wet" beneficia- tion processes (flotation) under a second stage development phase. JPMC has no commercial experience with flotation technology. Feasibility study work has identified the need for further research to optimize the proposed beneficiation processes and to maximize the economic benefits that could accrue under a possible second stage mine development. Of particular concern, following laboratory work undertaken to date, are the relatively low beneficiation plant TCP recoveries (as low as 37 - 43%) resulting from high (34-50%) losses resulting from screening oversize. JPMC recognizes that substantial economic gain would result from increased TCP recovery and that extensive research in this area has been undertaken worldwide, particularly in China and in the USA. The Project will provide consultants to assist JPMC to orientate and implement an appropriate research program and will provide for key JPMC staff, responsible for beneficiation, process design and research, to visit China, the USA, and other countries, to familiarize themselves with beneficiation research and with worldwide state-of-the-art beneficiation. Overseas visits will be supplemented by seminars in Jordan by foreign experts. The foreign cost of this technical -25- assistance is estimated at US$134,000 for 5 man-months @ US$14,000 per month plus US$20,000 for travel and subsistence and US$44,000 for JPMC staff overseas travel and subsistence (2 trips for 4 people). 4.27 Corporate Planning, Finance and Internal Audit. JPMC mine and corporate planning and its internal auditing functions have been handicapped by a shortage of higher level staff with sufficient knowledge of corporate planning, finance and investment evaluation methodology. In order to permit the establishment of effective corporate planning and internal audit units, selected technical staff will be assisted by a consultant to develop long-range mine plans over a 10-year horizon and selected Finance Department staff will receive training in financial analysis, financial planning and project cost - benefit analysis. In order to ensure suitable and practical training of financial staff, the proposed training program will comprise mainly "workshops' and 'on-the-job' training, whereby the trainees will work within their organization on practical problems, under the supervision and with the assistance of visiting foreign experts, who will supervise the team work and prepare/review their work program and progress. The Project will finance the foreign cost of the experts, including travel and subsistence. The foreign cost of this technical assistance component is estimated at US$146,000 for 9 man-months (4-5 sessions of 2 months for one expert), at US$14,000 per month, plus US$20,000 for travel expenses. 7. Project Costs 4.28 The estimated financing required for the Project is US$89.0 million (JD 29.47 million), including physical and price contingencies, working capital and interest during construction, as summarized below. The base cost estimate is in September 1987 prices. Physical contingencies are calculated at 5% for local costs and 10% for foreign costs reflecting JPMC's extensive recent experience with local contracting and the lower level of certainty regarding offshore equipment costs. Price escalation has been based on the phasing of commitments and expenditures consistent with the time schedule for implementing the project, and projected local and international inflation rates, assuming that US dollar exchange rate adjustment will on average maintain purchasing power parity. A domestic inflation rate of 3.0% per annum has been applied throughout the project life. International inflation rates are projected at 3.0% for 1987, 1.0% for 1988-90 and 3.5% for 1991 and thereafter. -26- Jordan - SMMdiya Project - Stm&y of Project Cost Forelg lomd F aeti Total Lca Fiorep Total as X of X Of - JD Thmosd - - US$ Miliao - Total To1tl Min Equipunt 965 10,034 10,999 2.9 30.3 33.2 .91 37 Mllaite quipemnt 418 2,059 2,477 1.3 6.2 7.5 83 9 Civil Works & Infrastrctre 2,677 2,699 5,376 8.1 8.2 16.3 50 18 Dust Cntrol Equijt / 200 500 700 0.6 1.5 2.1 71 2 ngiieering & Tech. Asist. 1,510 240 1,750 4.6 0.7 5.3 13 6 Base Cost 5,770 151532 21,302 17.5 46.9 64.4 73 72 Physical Contiiencies 288 1,553 1,841 0.9 4.7 5.6 84 6 Price ContineEcies 243 692 935 0.7 2.1 2.8 75 3 Iista1]ed Cost 6.301 17,M 24,078 19.1 53.7 72.8 74 81 Wotikig Capital 1,424 3,344 4,768 4.3 10.0 14.3 70 17 Project Cost 7.725 21,121 28,846 23.4 63.7 87.1 73 98 Intrest Dring Constuctimx - 629 629 - 1.9 1.9 100 2 Total Financing Rquired 7,725 21,750 29,475 23.4 65.6 89.0 74 100 - - = _ - al Base cost and OWsical onntizg -ies (in September 1987 prices) have been calonlated using an - excag rate of 1 Jordanian Dinar US$3.02. b/ Costs iiluaie iuursace and freidt haes, eqiPmet erectim, OmmnlssioIg, aprator trainilg and initial invemozy of spare parts. cv ITns dist allectors and mditorg stations. 4.29 Cost estimates are based on JPMC's cost experience in procuring similar equipment and works during recent years, updated to September 1987. The estimated working capital requirements are based on initial prestripping at the mine representing 3 months of operating costs, additional product inventory at the mine representing 14 days of sales, one month of working expenses (consumables, salaries), two months of sales in commercial receivables, and 25 days of sales in commercial accounts payables. The estimate is based on JPMC's actual (1986) working capital structure. Technical assistance cost estimates are on the bases described in paras. 4.25-4.27. 4.30 The total capital cost for the project, including physical contingencies but excluding price escalation, working capital and interest during construction is US$45 per tonne annual output of phosphate rock, which is in line with current cost estimates of typical developing -27- countries' open-pit mine development experience worldwide. The project includes procurement of most mining equipment and a substantial portion of civil works and infrastructure that would be required to increase production from 1.5 to 3.0 mtpy during a possible second stage development. The Project can, therefore, be considered competitive with worldwide open-pit mining unit investment costs. 8. Financing Plan 4.31 The financing plan for the project is shown below. Total financing required is US$89.0 million of which US$65.6 million or 74Z constitutes the direct foreign exchange component. The proposed Bank loan of US$31 million represents 47Z of the foreign exchange component and 35% of the total project cost. Jordan - Shidiya Project - Financing Plan (US$ million) Sources ltems to be Furnished Local Foreign Total Foreign IBRD Loan Mine and Millsite Equipment/Infrastructure/ - 31.0 31.0 Technical Assistance Domestic JPMC Cash Generation Mine Equipment, Millsite Support Equipment, Infrastructure, Dust Control Equip., Working Capital, and IDC 23.4 34.6 58.0 Total Financing 23.4 65.6 89.0 4.32 The proposed Bank loan would be made to JPMC at the standard IBRD variable interest rate and on country terms, i.e., a 17-year term including a 4 year grace period. The Government of Jordan would guarantee the loan. JPMC would pay to the Government annually, a guarantee fee equivalent to 10% of the Bank interest rate on the outstanding loan balance. JPMC would bear the foreign exchange and variable interest risk. 4.33 JPMC would finance all civil works and the majority of infrastructure costs. The Bank loan would finance foreign exchange costs of mining and millsite equipment, infrastructure (power distribution equipment) and technical assistance. JPMC may utilize US$15-20 million export credit financing for mine equipment. In this event, part of the Bank loan could be used to finance down payments not financed by export -28- credit agencies. The risk of a shortfall of funds from export financing agencies is considered to be small. 9. Procurement and Disbursement 4.34 Procurement. JPMC has traditionally procured equipment through ICB and is familiar with the Bank's procurement guidelines and procedures for goods and services. Although Bank proceeds will be utilized to finance only a portion of goods to be procured, all offshore equipment will be procured by ICB following Bank guidelines. This will facilitate identification of packages where the Bank would participate in joint financing with export credit agencies. Bank participation would be to finance downpayments (traditionally 15X of contract value) if required by export credit agencies. Packages which are clearly suitable for Bank financing (Annex 4-4) have been tentatively agreed with JPMC. 4.35 Contracts for a total estimated 8 offshore packages (US$28.5 million - list of wain Iteam are given in Annex 4-4) would be awarded following ICB. Packages not exceeding US$350,000 each and up to an aggregate value of US$2.5 aillion will be procured by LIB from at least 4 suppliers and at least 3 different countries. All ICB packages and the first 3 LIB packages to be issued, regardless of value, will be subject to prior review by the Bank. This constitutes over 95% of the value of all goods financed out of the loan, the balance being subject to post review. All Bank financed consulting and technical assistance services will be procured in accordance with Bank guidelines. 4.36 Details of procurement of goods and services are shown in the table on the following page. -29- Jordan - Shidiya Prolect - Procurement Arranxements (Installed Cost US$ million) Prolect Element Procurement Method Total ICB LIB Other b/ Mine Equipment 32.5 1.7 3.3 37.5 (18.0)f/ (1.7) (-) (19.7) Millsite Equipment 6.9 - 1.5 8.4 (6.9) (-) (-) (6.9) Civil Works & Infrastructure 5.3 - 13.1 18.4 (3.6)VX (- (- (3.6) Dust Control Equipment - - (2.5) (2.5) Engineering & Technical Assistance - 0.8 5.2 6.0 (0.8) (-) (0.8) TOTAL 44.7 2.5 25.6 72.8 (28.5) (2.5) (-) (31.0) a1/ Figures in parenthesis are the respective amounts to be financed by the Bank loan. h/ Other includes mine development, civil works, infrastructure and engineering and dust control equipment being undertaken under local bidding procedures. c The Bank loan will finance only select items of infrastructure equipment. JPMC will finance all civil works. 4.37 Disbursements will be made against (a) 100% of the foreign cost of directly imported goods, and (b) 100% of the total foreign cost of overseas training of JPMC staff and consultancy cost of technical assistance component. Disbursements would be made against full documentation except for technical assistance components and any other contracts not exceeding US$100,000 for which disbursement would be made against statement of expenditures (SOE) procedure. JPMC would retain the necessary back-up documentation. To facilitate disbursement, a revolving fund Still be established In a bank acceptable to the Bank with an initial deposit of US$2.0 million to cover the estimated average expenditures of about 4 months. The estimated disbursement figures are shown in Annex 4-5, together with comparison with Regional industry project profiles and Bankwide mining projects. The estimated disbursement proflle is in line with both Bankwide mining projects and regional industrial projects. The Bank loan is expected to be fully disbursed by December 31, 1993, and the loan closing date shall be June 30, 1994. -30- 10. Project Management and Implementation 4.38 Project organization. Project engineering and design is being carried out by JPMC's Production, Projects, and Technical Affairs Departments. Procurement is being handled by the JPMC Supply Department which handles procurement for all goods and services for JPMC. A qualified engineer with many years experience with JPMC has been appointed Shidiya Project Director. The Project Director will report to a JPMC Steering Committee comprising the Deputy Managing and other Directors (Technical, Production, Finance, Supplies) of the Company. The Project Director is assisted by an Advisory Group which has been formed to perform detailed engineering tasks (geology, mining, beneficiation, infrastructure design), assisted as necessary by locally hired consultants. This Group comprises senior engineers from JPMC headquarters staff and from existing mines. Arrangements for project implementation are satisfactory. 4.39 The full organization chart for construction, including headquarters staff is given in Annex 4-3. A total of 261 personnel will be Involved in construction at the project site. Following the start of procurement activities a Shidiya project manager will be appointed at the mine site together with deputies in charge of mining, civil, mechanical, electrical, surveying and administrative divisions. The project management team will reside at the site and will be fully supported by a technical, skilled, semi-skilled and unskilled workforce. The JPMC Shidiya project staff will be essentially decentralized. Erection of plant and equipment will be performed by JPMC erection crews at site directed by representa- tives of the suppliers. Portions of civil works (townsite) and complex erection (draglines) will be undertaken by local contractors on a turnkey basis. 4.40 Prolect Status. The Project has been approved by the Ministry of Planning and is an integral part of the Government's 5-year plan. JPMC is proceeding with completion of detailed engineering and has initiated procurement activities with Bank approval. A general procurement notice for the project work was issued on April 16, 1987, and bid documents for main equipment items were issued on September 30 and October 31, 1987. 4.41 Implementation Schedule. JPMC's managerial and technical staff completed project preparation (feasibility study and preliminary engineer- ing) in January 1987, and are continuing with detailed engineering. Agreement on a realistic project implementation schedule was reached during appraisal (Annex 4-6) and forms the basis for financial and economic analysis. The necessary land required for the project is already allocated to JPMC by the Government. Access road construction is being financed and supervised by the Ministry of Public Works. The JEA opened tenders in March 1987 for turnkey construction of power supply to the project site and construction is planned to be completed by October 1988. Procurement of main mining and beneficiation plant equipment has been initiated by JPMC since September 30, 1987. Commissioning of mobile mining equipment will be completed by June 1988, to facilitate development of a mine "opening cut"; -31- and phosphate rock production will commence In July 1988. Physical project completion is expected by early 1990. V. TRANSPORT AND PORT INFRASTRUCTURE A. Land Transport Arrangements 5.01 Phosphate rock is currently transported to Aqaba from existing mines at E1 Hassa and El Abiad by both rail and truck. Essentially trucking is utilized to the extent that railway capacity is not available at present to transport all phosphate produced. Recent statistics for transport of phosphate to Aqaba are summarized below: Jordan - Phosphate Transport to Anaba (million tonnes) Year Road Rail Total % by Rail 1984 1.57 3.20 4.77 67 1985 1.83 2.25 4.08 55 1986 2.80 2.58 5.38 48 Source: JPMC. 5.02 Transport of phosphate by rail is somewhat erratic in terms of monthly throughput, due primarily to the poor condition of the existing narrow gauge rail line and occasional derailments due to poor track maintenance. The percentage of phosphate carried by rail has declined in recent years. The decline in rail capacity has not been a pressing concern to JPMC as present truck tariffs at JD 1.7-1.8 (US$ 5,50-5.80) per tonne are more attractive than rail tariffs (US$7.00 per tonne--Chapter 7 and Annex 7-1). 5.03 Under the Bank's Multi-Node Transport Project (Loan 2463-JO), track renewal on critical rail sections between existing mines and Aqaba, rehabilitation of locomotives, improvement of maintenance facilities, and technical assistance and training to the Aqaba Railway Corporation (ARC), will enable ARC to carry up to 4.5 mtpy phosphate by 1988. The proposed Transport III project may envisage the extension of the railway line to Shidiya, depending on the economic and financial justification of this extension. With projected annual production from existing mines of 6.7 mtpy from 1987, JPMC will still maintain truck contract arrangements to transport up to 2.5 mtpy of phosphate rock. 5.04 As far as the project is concerned, with ARC being unable to transport all phosphate produced at existing mines (which are further from Aqaba than Shidiya), JPMC will contract with truck companies to carry the 1.5 mtpy project production from Shidiya to Aqaba. Bids for this contract -32- will be issued by JPMC in late 1987. With sufficient trucking capacity in Jordan, there will be no difficulty in finding responsive bidders. Indeed, with the proposed longer term truck contract envisaged by JPMC, unit rates will probably be in the order of US$5.0 per tonne. B. Aqaba Port 5.05 The Port of Aqaba was established in 1952 and is operated by the Aqaba Port Corporation (TPC), an independent public corporation. The port includes seven general cargo main berths, two shallower cargo berths, two lighter berths, and two phosphate loading berths. Two rail intake and six road intake unloading facilities are available for receiving phosphate and six sheds are available for phosphate storage (see Map IBRD 19921). 5.06 Rail intakes have a capacity to handle 7.5 mtpy phosphate, which far exceeds the capacity (currently in the 1.5-3.0 mtpy range and likely to reach 4.5 mtpy In 1988 following present rail rehabilitation of the incoming rail line). Road Intakes can handle 5.0 mtpy phosphate. Thus the phosphate receiving facilities could handle 9.5 mtpy phosphate, compared to 8.2 mtpy after completion of the project. 5.07 Phosphate can be loaded by two berths "A" and "B". Berth "B" is 180 meters long with 15 m depth alongside and can accommodate 100,000 dwt vessels. There are two shiploaders on the berth each of 2,100 t/hr capacity served by conveyors from four phosphate storage sheds (3,4,5 and 6). Berth "A" can accommodate vessels up to 25,000 dwt and is provided with a non-slewing conveyor rated at 1,000 t/hr. Berth "A" is not currently required for phosphate loading and is used for other cargo purposes. The loader on the berth can be fed from storage sheds 1 and 2 or alternatively by conveyor from sheds 4 through 6. 5.08 Berth "A" can load 1.7 mtpy and Berth "B", 7.8 mtpy phosphate, a total of 9.4 mtpy. Although this exceeds the projected export levels after completion of the project, some excess capacity is required in view of seasonal variation in demand and variation in dispatching by customers of vessels to Aqaba for loading. 5.09 Six sheds with a total capacity of 341,000 t are available for storing phosphate at Aqaba. Throughout 1986, the sheds were maintained at close to full capacity by effective communication between phosphate mines management and JPMC port representatives at Aqaba. With the flexibility of the installation, the excess intake capacity at the road/rail intakes, and present railway rehabilitation work, the storage facilities are considered adequate for the increased levels of export after project completion. 5.10 Port handling tariffs paid to TPC by JPMC are governed by Ministerial Decree. Tariffs are set on a sliding scale with a 600 fils (US$1.92) per tonne tariff in excess of 2 mtpy throughput. This tariff is considered reasonable and has been used in the financial analysis of the project. -33- VI. FINANCIAL ANALYSIS A. Past and Present Financial Performance 6.01 Over the 1982-85 period, JPMC followed a prudent financial policy with effective cost control and conservative investment and borrowing. Its profitability (JD 16.1 million in 1985), borrowing (long-term debt/equity ratio of 26/74), repayment capacity (debt service ratio of 3.5), and cash situation (JD 3.1 million cash available) were satisfactory until 1985 (Annex 6.1). However, 1986 was a turning point for JPMC: declining world phosphate prices started to reduce its profitability, and the absorption of the fertilizer plant (formerly JFI) placed a heavy financial burden on JPMC with an additional debt service of JD 2.8 million and a net cash cost of JD 5.7 million. The 1985-86 depreciation of the US dollar against the Jordanian Dinar also reduced JPMC's profitability, as phosphate rock and fertilizer prices are denominated in US dollars on the world market. However, JPMC still made a consolidated net benefit of JD 1.0 million, but its cash situation has become tight and its bank overdraft reached JD 15.4 million. -t~~~~~h a IP lisl 3D) 1982 1984 19eratas J1C RA%eiB 61.9 609 77.4 82.8 76.2 24.5 W.6 OpersaW Coats 46.3 43.9 55.4 57.6 61.2 24.5 85.8 Casb Generatian 15.7 169 22.0 25.1 14.9 (0.1) 14.9 interest 2.6 2.6 3A 2.7 24 2.7 5.0 Depedation 7.8 6.2 6.2 5.9 6.0 2.8 8.9 Net PRadt (before Tans) 5.2 8.2 12.0 16.5 6.5 (5.6) 1.0 Bait e sheets Assets Net Fi,md Aets 45A6 43.6 43A 44.4 286 49.9 78.4 Stock P?roMts 8.1 13.1 7.9 13.5 16.5 1.9 18.4 Stores and R tal 7.6 7.1 7? 7.7 7.9 7.9 15.8 Otber Shorter Asts 25.0 163 23.3 36.8 37.5 7.3 44.8 Car Available 0.1 9.5 14.2 3.1 0.0 0.0 0.0 LiablUties Equity 45.4 45.9 49.1 57.0 33A4 24.2 57.6 ImgTern Lamm 16.8 28.2 26. 19.7 16.4 23.9 40.2 Acmts Payable 16.2 14A6 20.6 28.7 31*1 13.2 44.3 Shor Tem Loans 7.9 0.7 0.1 0.0 9.6 58 15.4 Sores ad Apaicat1as of FiWs Cash Flat - 16.9 22.0 25.1 14.9 (0.1) 14.9 LaeTernDebt Incm - 15.0 2.7 (2.3) 1.7 29.5 31.2 Total L.c1erm Sores - 32.0 24.7 22.8 16.7 29.4 46.1 Applicaticmts INestnmt - 4.1 6.0 6*9 20.0 22.7 42.7 Debt Service - 5.4 7.4 72 6.7 2.9 9.6 Dividns ad Tas - 7.7 6.9 8.6 0.4 0.0 O0 Total 1ermAppltlai - 17.2 223 22*7 27.1 25A6 52.7 Worldng Caital Variatico - (1.8) (3.0) 11.1 23 9.6 I48 Cash Incree (Decrease) - 166 5.4 (11.0) (12.7) (5.7) (18. 5) Ratio thing Ratio 0.74 o072 0.71 OA 0.82 1.0 oas Debt Seri ComuP - 3.15 2.98 3.50 2.21 (0.03) 1.55 Debt/ftdty 2872 39/61 36/64 27/73 35/65 53/50 43/57 Liquid 1.69 2.9 2.55 2.13 1.52 0.90 1.33 -34- 6.02 Cash Generation and ProfitabilitY (-1982-85). Over the 1982-85 period, JPMC's cash generation increased rapidly from JD 15.7 million (25X of revenue) to JD 25.1 million (30% of revenue). Net profit also improved sharply from JD 5.2 million in 1982 (8.4X of revenue) to JD 16.6 million in 1985 (19.9X of revenue), due to: (i) a substantial production increase from 4.4 to 6.2 mtpy; (ii) a shift in sales structure in favor of higher grade rock; (III) the appreciation of US dollar against the Jordanian Dinar over the 1982-85 period; and (iv) an effective production cost control, which reduced mining production cost per tonne from JD 10.17 in 1982 to JD 9.39 in 1985 (Annex 6-2). Simultaneously, the company's prudent investment and borrowing policy kept interest on the long-term debt constant in nominal terms, and annual depreciation at a low level. 6.03 Investment and indebtedness (1982-85). JPMC's annual capital Investment ranged from JD 4.3 to 7.3 million. Moderate long-term borrowing raised the debt/equity ratio from 28/72 in 1982 to a still conservative 33/67 in 1985. JPMC's cash flow after debt service, taxes and dividends was sufficient to cover JD 6 million of working capital requirements, but only 14Z of investment. 6.04 Working Capital Management.. During the same 1982-85 period, the company managed to reimburse JD 7.9 million of 1982 outstanding short-term debts and to increase cash reserves up to JD 3.1 million in 1985. Less positive was the increase in receivables (those due from the Government reached JD 10.3 million). However, the company's current liquidity ratio improved from 1.69 in 1982 to 2.13 in 1985. 6.05 The 1986 Restructuring. The total cash cost of the JFI acquisition, including the Fertilizer Unit's 1986 debt service, was about JD 34 million. This was covered up to JD 6 million by an increase of the Fertilizer Unit's bank overdraft, and for JD 28 million by the Mining Unit. In the Mining Unit, these funds came from (i) the Mining Unit's cash flow for JD 2 million; (ii) a reduction in cash available for JD 3 million; (iii) a bank overdraft increase for JD 9 million; (iv) new long-term debts for JD 2 million; and (v) the sale of JPMC's financial participation In various corporations for JD 12 million. The overall cash impact on JPMC's liquidity was minus JD 18 million. 6.06 At the time of the merger, the Fertilizer Unit's sales barely covered its cash production costs. Its cash generation was only minus JD 72 thousand, mainly because of the low sales price of DAP, and the high price of sulphur and ammonia, which represented 34% and 14% of cash pro- duction costs, respectively. Taking into account the annual depreciation (JD 2.8 million) and the interest on the debt (JD 2.7 million ), the -35- Fertilizer Unit's loss was JD 5.5 million, and its corresponding cash deficit after debt service was Jt 2.9 million. 6.07 In the Mining Unit, 1986 was not as good as 1985, because of the declining phosphate rock prices (minus US$3 per tonne), and the devaluation of the US dollar compared to the Jordanian Dinar by about 10%. Despite increasing sales, revenues declined from JD 82.8 million to JD 76.2 million. On the other hand, total cash operating costs increased although moderately, by 6.2%, from JD 57.6 million to JD 61.2 million. The resulting Mining Unit's cash generation plunged from JD 25.1 million in 1985 to JD 14.9 million in 1986. With stable depreciation and Interest on the debt, the Mining Unit's net result before taxes was JD 6.5 million, some JD 10 million below its 1985 level. In cash terms, the Mining Unit's cash flow after debt service was reduced to JD 8.2 million, compared to JD 17.9 million in 1985. However, In the absence of the acquisition of JFI, 1986 would have been an acceptable year: the net result before taxes was 8.5% of revenue, and the Mining Unit's cash situation would have been Improved by JD 8 million, raising the Mining Unit's cash available to JD 11 million. 6.08 Hence, as of end-1986, the Mining Unit was still financially strong, with a good borrowing and repayment capacity; the Fertilizer Unit was just covering its cash cost and was relying on the Mining Unit's strong cash generation to service its debt and finance its working capital. The overall company emerged from the 1986 restructuring with a weakened cash position (total overdraft JD 15.4 million), but still a safe 1.55 debt service ratiot a conservative 42/58 debt/equity ratio, and an acceptable 1.33 liquidity ratio. B. Financial ProJections 6.09 Financial projections for the 1986-98 period have been prepared for the Mining Unit (Annex 6-3) and the Fertilizer Unit (Annex 6-4) separately, in order to assess each unit's profitability, and for JPMC as a whole, to ascertain the Company's long-term financial viability. The basis for these projections are: (i) conservative projections for world phosphate rock, fertilizer and fertilizer input prices (para. 3.12 and Annex 6-5); (ii) JPMC long-run sales program with exports limited to 7.1 mt in 1990 and 8.0 mt in 1995 (Annexes 4-1 and 6-6); (iii) El Abiad and El Hassa miniag plans based on the probable depletion of their reserves by 1992 and 1997 (Annex 6-7); (iv) the development of the Shidiya area beyond the proposed project with the staged implementation of Shidiya II and Shidiya III projectst to gradually replace the old mines (Annex 4-1); and (v) unit production costs as calculated in Annex 6-2. All projections are in current Jordanian Dinars. Inflation rates used in the calculation are 3% p.a. for local inflation. For international inflation, the annual rates are 1987: 3%; 1988-90: 1%; 1991 and after: 3.5%. A sensitivity analysis was carried out to estimate JPMC's financial survival capacity under lower phosphate rock and fertilizer prices. The conclusion is that the Company can sustain 10% lower prices without running into financial difficulties. -36- 1. Mining Unit 6.10 The Mining Unit's financial performance is expected to be satisfactory and improve in the future, because of the low production cost of future mines, and increasing mining efficiency, while world prices are expected to increase moderately. Starting with a conservative financial structure (Annex 6-l), the Mining Unit is not anticipated to meet substantial cash problems, and will remain JPMC's moot profitable sector. JPMC's pro-forma projected financial statements for the Mining Unit for the 1986-98 period are given in Annex 6-3. Jodm - Hunhw UMt: Sg= of Tnme iectim. 1986-97 1986 1987 1989 199 193 1995 1997 Thaw s tate senusM 76.2 74.1 94.9 107.6 123.5 144.2 153.2 OpwnatJtg Costs 61.2 62.3 71.0 78.5 87.9 99.6 106.1 Cash Gsmrawtlai 14.9 11.9 23.9 291 35.7 44.6 47.1 _aertart 24 1.9 2.8 5.4 6.1 4.6 3.1 Deprecation 6.0 6.0 8.6 13.9 16.9 17.4 15.1 Not ieflxt (before TuYP) 6.5 4.0 12.5 9.8 12.7 22.6 28.8 -~~ ~ ~ - ^^sset NotT hld Asets 28.6 28.6 44.9 86.5 97.2 69.8 51.1 Stock Pzo&iCt8 16.5 17.2 21.9 25.1 28.7 33.8 36.0 Store and RlMatedal 7.9 9.9 8.4 3.2 4.9 6.1 6.5 Ottw? Sbxot-'T1m Assets 37.5 36.4 35.8 32.4 37.1 43.5 46.4 Cmh AvaiW"l 0.0 18.4 13.8 20.7 27.3 59.2 85.7 Total Assets WS 110.5 124.8 168.0 1M5 12h 225. UiabiUttiis <qj
Группа Всемирного банка · Staff Appraisal Report
Jordan - Shidiya Phosphate Mine Project
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