Israel - Dead Sea Works - Potash - Project

R E S T R I C T E D RL CWY R e p o r t N o. P-25] This report was prepared for use within the Bank. It may not be published nor may it be quoted as representing the Bank's views. The Bank accepts no responsibility for the accuracy or completeness of the contents of the report. [NTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO MIFALEI YAM HAMELAH B. M. (DEAD SEA WORKS LIMITED) June 8, 1961  I'IITERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND 1ECONMENDATTONS OF TIE PRESIDENT TO THE EXECUIIVE DIRECTORS ON A PROPOSED LOAN TO I4FALEI YAi HAHIELAH B.1,1. (DEAD SEA WORKS LIIITED) POTASH PROJECT 1. I submit herewith the following report and recomMendations on a pro- posed loan in an amount in various currencies equivalent to U.S. *$25 million to 1N1ifalei Yam Hamelah B.M. (Dead Sea Works Limited) at Beersheba in Israel. PART I - EISTOFJGAL 2. In September 1959 the Government of Israel approached the Bank concern- ing the possibility of financing various p,:'jects in Israel. In September 1960 the Bank made a loan for the Asndod po;-t project and informed the Govern- ment that it w,ould consider a loan for the Dead Sea Works project if the capitalization of the Company were appropriately changed and if financing of the entire cost of its expansion program were suitably arranged, Following negotiations with various financial groups in Israel and abroad, represent- atives of the Government and the Company- worked out a financial plan in discussions with the Bank in Washington and Israel from Febroary through April 1961. Negotiation of the loan took place in Washinrgton from Lay 23 to June 2 with representatives of the Bank of Israel, I'E.nistry of Finance, Ministry of Development and the Company. PART II - DESCRIPhION OF PROPO&SED LOAN 3. Borrower 11ifalei Yam Hamelah 3,!I. (Dead Sea 'Torkts Limiced) Guarantor The State of Israel. Amount The equivalent in various currencies of -425 million. Term 15 years, including a grace period of 5 years, Amortization 21 semi-annual instalments commencing November 15% 1966 and ending November 153 1976  -2- Interest Rate To be deterrined. Commitment Charge 3/4 of i per cent per annum. Payment Dates Miay 15 and ITovember 15. Purpose For the construction of additional facilities designed to increase the production of potash and bromine and newL facilities for the production of magnesia, bromine compounds and table salt, 4. This loan wrould be the Bank's second to Israel, The first, for 827.5 million for the Ashdod Port project, was signed September 9, 19060 Repayments on this loan are scheduled to commence in 1965 and extend to 1985. No sales have been made to third parties. As of 11ay 31, $593,683 of the loan had been disbursed. The proposed loan would increase the amount of the Bank's loans to Israel to $52.5 million. PART III - DESCRIrTION OF THE PROJECT 5. A detailed appraisal of the project (T.O. 285a, dated June 7, 1961) is attached (Yo. L!-). The Project 6. The Company produces mainly potash, salt and through its subsidiary, Dead Sea Bromine Company Ltd., bromine and ethylene dibromide. The Dead Sea contains practically inexhaustible quantities of mineral salts including an estimated 2 billion tons of potash. 7. The Dead Sea WTorkis Ltd. was establisihed by the Government of Israel in 1952 and took over the assets in Israel of Palestine Potash Co. Ltd. Large investments were made by the Govermnent in re-building and expanding the plant at the south end of the Dead Sea and in providing access roads, utilities, housing and other basic services. From 1955, under the present management, output increased rapidly and reached 1h0,000 tons of potash last year. Within two years the present plant will reach its ultimate capacity, 190,000 tons a year. Further expansion can be accomplished only with an ex- tension of the evaporating area into the Sea itself involving a large invest- ment in construction of dikes and other works which cannot be done economically except in a single stage. This extension will increase capacity by about three times to a total of about 600,000 tons per year. Approximately 60 kilometers of dikes will be constructed and about 100 square kilometers of the Dead Sea enclosed for use as concentrating pans. A new refinery will be built and the existing refinery pill continue to process material from the existing evaporat- ing pans. In a second stage, the potash plant's capacity is to be expanded by an additional 200-300,000 tons, at an estimated cost of anproximately  -3- 5 3-15 million. The Company should be able to cover most of this investment ith internally generated funds. 8. The concession granted to the Company gives it exclusive rights to Droduce and exploit the mineral salts, minerals and chemicals in the Dead Sea and gives it the right to lease all lands required for its present operations and which it may require for later development. The concession will run until the end of this century and the Company will have first refusal rights in the event that the State is prepared to grant a new con- cession. In consideration, the Company wTill pay the Government a royalty of 5 per cent of the ex-works price of its products. The Government has under- taken to provide adequate roads, railways and port facilities for the Company. 9. The Dead Sea Bromine Company, a wholly owned subsdidiary, was established in 1955 to produce bromine and bromine products from the waste brine of the potash process. Hanagement and operation of the subsidiary is by the parent Company. The bromine subsidiary will expand its production to 10,000 tons of bromine per annum including 6,000 tons of ethylene dibromide. The Bromine Compounds Co. Ltd., 50 per cent oimed by the Bromine Company and 25 per cent each by an American and a British Company, has been formed to manufacture various bromine derivatives. l0, The Dead Sea M$gnesite Company Ltd. w'as formed to produce 75,000 tons per year of magnesite, a refractory material, fromi the brines of the Dead Sea and dolomite, which is available in quantity nearby. A preliminary agreement betwTeen the Dead Sea Yborks and two U.S. companies calls for the investment of 16,5 million equivalent ultimately by the Company. The Company w-ill hold 50 per cent of the share capital, the American partners will supply know-how and capital and market the products of the Iagnesite Company. 11. The construction period is estimated at L2 months for the dikes and pans and 36 months for the refinery and mfi-ll extend until April 1965. The bromine and ethylene dibromide plants are to be completed by the end of 1961. The Financial Plan 12. In response to the Bank's suggestion, the Government agreed to reduce and to limit its interest in the Company. The Government's share of the equity will be reduced from 58 per cent to b5 per cent and its voting rights from 80 per cent to 35 per cent. This agreement is in accordance wiith its policy of favoring private investment in Israel, whether in new or existing enterprises, governmental or private. This policy has been elaborated in the Government's platform and in the Law for the Encouragement of Capital Invest- ments, enacted in 1959. In line with this policy sales of the Government-held shares of -the Dead Sea IJorks may be made at a future date, market conditions permitting. 13. The project is estimated to cost about $70 million equivalent which would be met from the proposed $25 million Banl loan, a A10 million loan from the Bank of America, a new share issue of IJ. 27 million (equivalent to 1'15 million) and approximately $20 million from retained earnings during the  four-year construction period. By the Government Conversion and Loan Agree- ment to be entered into betwxeen the Govermient and the Company, outstanding Government loans to the Company and its subsidiary, the Dead Sea Bromine Company, amounting to I.T 38.7 million (121.5 million) are to be converted into I.; 11.8 million (16.5 million) of 5 per cent Junior Debentures and into "A" ordinary shares and the Government will make loans not exceeding the equivalent of payments of interest on the Junior Debertures held by it and dividends received by all "All shareholders during the construction period. The Governnent is to distribute part of the Junior Debentures and "A" shares to the other old shareholders in return for their agreement to the re- capitalization, including waiving of pre-emptive and other rights and amending the Companyts liemorandum and Articles of Association. This agreement wras given at a special meeting of the shareholders 'May 31, 1961. After giving effect to the re-capitalization and the new share issue, there would be outstanding "A" shares equivalent to 917 million (IJ 300,6 million) and new ordinary shares of 15 million equivalent (I.; 27,0 million). These shares would be held by: Government 45 per cent, other old shareholders 8 per cent and new ordinary shareholders 47 per cent, The principal and interest of the Junior Debentures would be linked to the dollar; I.; 10,807,749 would be held by the Government and I.; 970,000 by other present shareholders. The Junior Debentures would be repayable in ten equal annual instalments from 1971 through 1980. In point of security they would be subordinated to the Bank loan, the Bank of America loan and all other secured borrowing. 14. The I.; 27 million share issue is to be underwtritten by a syndicate headed by the Bank Leumi Le-Israel and other banks representing most of Israel's banking community. The Bank has reviewed the terms and conditions of the underwriting agreement in which it concurred, The shares are to be offered at I.; 1.07 per share and under the terms of the undenrriting will net the Company at least par. The prospectus for the issue would be re- gistered and distributed after the Bank's Executive Directors authorized the proposed loan. A reference to this authorization would be contained in the prospectus. 15. The !s10 million loan from the Bank of America would be repaid in five equal instalments of $2 million each from 1965 through 1969. The rate of interest would be determined January 2, 1962, based on the prime-rate but between 5 per cent and 6 per cent per annum. Procurement 16. Goods and services will be procured on the basis of international com- petition to the extent practicable. Bidding on certain chemical processing equipment necessarily may be limited to specialized manufacturers. PART TV - LEGAL INSTRUT'dEl\TS AN\D LEGAL AUTHOIUTY 17. Attached are drafts of the Loan Agreement (No. 1), the Guarantee Agreement (No. 2) and the report or the committee provided for in Article III,  Section 4(iii) of the Articles of Agreement (No. 3). Attention is drawn to the folloowing provisions of the Loan Agreement: (a) As security for the loan the Borrower wil1 execute and deliver a Trust Deed constituting a first specific mortgage inter alia on the immovable properties, buildings and fixed plant of the Borrower at its undertaking near Sdom, a fixed charge on the machinery and equipment in the undertaking and a floating charge on the Borrower's undertaking and assets. With certain excep- tions, listed in Sections 5.04 and 5oO5, this security wfould rank ahead of any other mortgage, charge or lien on the Borrower's property and assets. ltithdrawals from the Loan Account are limited to 36 million until the Trust Deed is executed (Section 2.02 (b) W4ithout the Bank's agreement no prepaymentsshall be made on other present long-term borrowings except out of the proceeds of an issue of ordinary shares (Section 5.07). (c) The Borrow^er is to enter into agreements, satisfactory to the Bank , with the Dead Sea Bromine Compounds Company and with the Dead Sea IMagnesite Company providing for their management by the Borrower and for the carrying out of tne obligations under the Loan Agreement pertaining to them (Sections 5.15 and 5.16). (d) The concession may not be altered without the Bank's agreement (Section 5.17). Amendment, abrogation or termination of the concession would be an event of default (Section 6.02(i)). (e) I;,ithout the Bank's consent, no long-term borrowing other than as provided in the present financial arrangerments may be made during the construction period, nor after the construction period if the long-term debt should exceed equity and surnlus (Section 5