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G lo b a l R e s e a r c h

Se p t e m b e r 2 0 0 8

E q u i t y

Arab Potash C om pany

Jo

rd

a

n

Sustainable Fundamentals ...

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Global Investment House KSCC

Sharq, Global Tower

P.O. Box 28807 Safat

13149 KuwaitTel: (965) 295 1000

Fax: (965) 295 1005

E-mail: [email protected]

http://www.globalinv.net

Global Investment House stock market indices can be accessed

from the Bloomberg page GLOH

and from Reuters Page GLOB

Omar M. El-Quqa, CFAExecutive Vice [email protected] No: (965) 295 1110

Faisal Hasan, CFAHead of [email protected] No: (965) 295 1270

Hettish KumarFinancial [email protected]

Phone No: (965) 295 1281

Syed Taimure AkhtarFinancial [email protected]

Phone No: (965) 295 1278

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Global Research - Jordan Global Investment House

Arab Potash CompanySeptember 2008

September 2008

BUY

ARAB POTASH COMPANY

Tickers: APOT.ASE (Reuters)

APOT JR (Bloomberg)

Listing: Amman Stock Exchange

Current Price: JD49.49 (As on 23rd September, 2008)

Investment Summary

Arab Potash Company (APOT) is a Jordan-based manufacturer and supplier of potash

primarily for use in agriculture. The company was formed in 1956 as a pan-Arab business

venture and has a 100-year concession from the government of Jordan to manufacture and

market mineral products derived from the Dead Sea. The company currently has potash

production of 1.9mn tons which the company plans to expand to 2.4mn tons by the end of

2009.

Expansionary plans led to the partial privatization of Arab Potash Company in 2003

separating the Companys main activities from the supporting ones, allowing for

private sector investment and subsequently enhancing the Companys efficiency and

competitiveness to meet the growing demand.

Its subsidiaries and affiliates include Numeira Mixed Salts and Mud Company, Jordan

Dead Sea Industries Company, Jordan Magnesia Company, Arab Fertilizers and Chemicals

Industries Ltd. (KEMAPCO), Jordan Bromine Company, Jordan for Investment and

South Development and Nippon Jordan Fertilizers Company. Arab Potash Company PLC

is headquartered in Amman.

The Company announced that it will enter a joint venture with Jordan Phosphate Mines

Company to establish a new company, which will invest approximately JD70mn

to rehabilitate the existing jetty and construct a new jetty in a period of 3 years. Both

companies will own a 50% stake in the newly established company.

The Companys sales revenue increased by 41% in 2007 to JD291mn as compared to

JD207mn in 2006, an increase of over 40%. This increase was possible because of anincrease in the sales volume which was also aided by rising prices. During 2007, the

company was able to sell 1.85mn tons of Potash, higher by 13% as compared to that in

2006. During 2007, the prices of potash increased by 8% to JD136/ton as compared to

JD126/ton in 2006.

The companys other sources of income include: interest & commission income, return

on cash deposits, foreign exchange activities and share of profit from associates. In

2007, a substantial profit was earned from these sources which amounted to JD75.8mn

as compared to JD6.9mn in 2006. During the year, company profit from associates

amounted to JD9mn as compared to JD5.6mn in 2006. In 2007, the company recorded

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Arab Potash Company September 20082

one time gains from gains of Jordan Magnesia Company and reversal of provision which

amounted to JD43.8mn.

The companys net income for the year rose from 284% to JD150mn (EPS: JD1.80) as

compared to JD39.13mn (EPS: JD0.47) in 2006. Its net margins rose heavily in the

wake of extraordinary income earned through other sources. As a result in 2007, the

Companys net margins rose from 18.9% in 2006 to 51.5% in 2007. In 2007, first quarter

was the most profitable, where the company earned JD52.4mn at margins of 78%, while

the least profitable was the third quarter in which the company earned JD21.8mn.

Total assets of the company rose by 36% to JD543mn as compared to JD400.4mn in

2006. During the year the major increase was witnessed in the project in progress account

which rose by 111% to JD76.2mn as compared to JD36.1mn in 2006. The increase in the

project was duet to the undergoing expansion of the potash business. Receivables and

inventories increased during the year by 60% and 80% to JD97.9mn and JD12.5mn in

2007. Other assets rose significantly during 2007 to JD47.9mn.

The Company reported net income of JD90.1mn (EPS: JD1.08) for the first half of 2008

as compared to JD98.0mn (EPS: JD1.17) in the same period of 2007. During the half year

period, the net assets of the company increased by 26.4% to JD566mn as compared to

JD543mn at the end of 2007.

The Company currently produces 1.9mn tons of potash, and it is undergoing expansion by

0.5mn tons is scheduled to come in during the second half of 2009. This would raise total

production capacity to 2.4mn tons by end of 2009. The Company is currently studying

the possibility of further expanding its capacity by another 0.5mn tons. This is still in the

tentative stage and thats why we have not factored it into our forecast.

The value of APOTs shares derived from the weighted average of the DCF and relative

valuation methods is JD61 per share. The stock closed at JD49.49 on the Amman Stock

Exchange at the end of trading on 23rd September 2008, which implies that the weighted

average value of APOTs shares is at a premium of 24.2% to the shares current market

price. At their current price, APOTs shares have a P/E multiple of 18.1x and 8.2x for

2008 and 2009 respectively. We therefore recommend a BUY on the Arab Potash

Companys stock at its prevailing price levels.

Table 01: Investment Indicators for Arab Potash Company

CMP (JD) Shares in Issue (mn) M-Cap (JDmn) 52-Week Low/High (JD)

49.49 83.3 4,123.4 16.79 / 95.61

YearGross Profit Net Profit EPS BVPS ROAE P/E P/BV

(JD 000) (JD 000) (JD) (JD) (%) (x) (x)

2009 (F) 685,832 501,023 6.0 11.7 36% 8.2 4.2

2008 (F) 319,532 227,537 2.7 6.6 30% 18.1 7.5

2007 (A) 137,126 150,191 1.8 4.7 32% 19.4 7.5

2006 (A) 87,129 39,138 0.5 3.2 12% 23.4 3.4

Source : Company Reports & Global Research.** Historical P/E & P/BV multiples pertain to respective year -end prices, while those for future years are basedon closing prices on the Amman Stock Exchange as of 23rd September, 2008.

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September 2008 Arab Potash Company

Chart 01: Share Price Performance of Arab Potash

0

1000

2000

3000

4000

5000

6000

1-A

ug-0

7

22

-Aug-0

7

12

-Sep-0

7

3-O

ct-0

7

28

-Oct-0

7

18

-Nov-0

7

10

-Dec-0

7

8-J

an-0

8

2-F

eb

-08

21

-Fe

b-0

8

13

-Mar-

08

6-A

pr-

08

27

-Apr-

08

20

-May-0

8

12

-Jun-0

8

3-J

ul-08

24

-Ju

l-08

14

-Aug-0

8

4-S

ep-0

80

20

40

60

80

100

120

ASE Index (LHS) APOT Price-JD (RHS)

Source: Zawya

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Arab Potash Company

Arab Potash Company (APOT) is a Jordan-based manufacturer and supplier of potash

primarily for use in agriculture. The company was formed in 1956 as a pan-Arab business

venture and has a 100-year concession from the government of Jordan to manufacture and

market mineral products derived from the Dead Sea. The Company, together with its affiliates,

produces a range of minerals, such as potassium chloride, potassium nitrate, industrial salt,

bromine and fertilizers. The company currently has a potash production of 1.9mn tons which

the company plans to expand to 2.4mn tons by the end of 2009.

The Company currently employs 1,933 employees distributed across its offices and sites.

Moreover, the Company made great advancements in the information technology field in

terms of planning and infrastructure. It has achieved many ISO awards due to its regulations

of quality, environmental, and safety management.

Chart 02: Capacity Expansions at APOT

0.5

0.7

0.9

1.1

1.3

1.5

1.7

1.9

2.1

2.3

2.5

1983 1987 1994 Current 2009

(mnTons)

Source: Company Reports & GlobalResearch

Its subsidiaries and affiliates include Numeira Mixed Salts and Mud Company, Jordan

Dead Sea Industries Company, Jordan Magnesia Company, Arab Fertilizers and Chemicals

Industries Ltd. (KEMAPCO), Jordan Bromine Company, Jordan for Investment and South

Development and Nippon Jordan Fertilizers Company. Arab Potash Company PLC is

headquartered in Amman.

Arab Fertilizers and Chemicals Industries- This company, founded in 1998, was a joint venture

with Kemira Agro of Finland; it produces 150,000tpa of potassium nitrate fertilizer and75,000tpa of Di-calcium phosphate animal feed supplement. In February 2007, the Company

acquired 50% more shares of Arab Fertilizers and Chemicals Industries (KEMAPCO) thereby

becoming the sole shareholder of KEMAPCO.

Numeira Mixed Salts and Mud Company - APOT owns 100% of this company founded

in 1997, producing mixed salts and Dead Sea Mud for the cosmetics industry - this

company has 60 clients for its cosmetic mud in Jordan alone.

Jordan Dead Sea Industries APOT owns 100% of this company, which is currently inactive.

The company is engaged in the production of 50,000tons of Tetra Bromo bi-sphenol and

35,000tons of calcium bromide.

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Chart 03: APC Subsidiaries/Associates/Affiliates

100% Ownership 55.30% Ownership 100% Ownership

100% Ownership 50% Ownership

45.45% Ownership

20% Ownership 20% Ownership

Arab Fertilizers and

Chemicals Industries

Jordan Bromine

Company

Jordan Magnesia

Company

Jordan Investment and

South Devp

APC Subsidiaries/Associates/Affiliates

Jordan International

Chartering Company

Nippon-Jordan

Fertilizer Company

Jordan Dead Sea

Industries

Numeira Mixed Salt

and Mud Company

Source: Zawya & Company Reports

Jordan Magnesia Company - APOT owns 55.3% of this company, which is currently inactive.

Founded in 1997, the company is dedicated to the production of 60,000tpa of magnesium

oxide and magnesium hydroxide; the start-up investment cost was US$100mn.

Jordan Bromine Company - APOT owns 50% of this company. The Companys share

in Jordan Bromine profit is 30%, and 50% in losses and liabilities as stated in the share

agreement signed with Albarmarle Holding Company. This company is a joint venture with

Albemarle Holdings Company of the United States, dedicated to producing bromine and

bromine derivatives, including 50,000tpa of bromine; 25,500tpa of tetra bromo bi-sphenol-

A (TBBP-A), used as a flame retardant; 40,000tpa of calcium bromide, which is used in the

oil drilling industry; 10,000tpa of sodium bromide, used in photography; and 2,500 TPY of

hydrogen bromide.

Nippon Jordan Fertilizers Company - APOT has a 20% stake in this joint venture along

with ZEN-NOH, Mitsubishi Kasei, Asahi and Mitsubishi Corporations 60%; and Jordan

Phosphate Mines (JPMC) 20%; it produces 300,000tpa of NPK fertilizer and DAP Fertilizer

and operates a port facility in Aqaba. It began production in 1997.

Jordan International Chartering Company - APOT has a 20% stake in the company. JICC

opened its doors for the first time on 3 August. Its formation brought together into onecompany four major shipping and fertilizer interests, as the shareholders in the new company

are Jordan National Shipping Lines, Jebsen International, Jordan Phosphates Mine Co. and

Arab Potash Company.

Shareholding

The major shareholder in the company is PCS Jordan LLC a wholly owned subsidiary of Potash

Corporation of Saskatchewan, a Canadian company, which is the worlds largest fertilizer

enterprise, producing the three primary plant nutrients: potash, nitrogen and phosphate. PCS

Jordan LLC acquired 26% of the issued and outstanding common shares of Arab Potash

Company from Jordan Investment Company (JIC) for US$173.8mn. Subsequent to the

acquisition, APOT was 26.88% held by JIC, 27.96% by Potashcorp, 19.96% by Arab Mining

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Company, and the remainder of APOT shares were held by other governments, banks and

individual investors. As part of the acquisition transaction, Potashcorp nominated individuals

to the top four management positions at APOT.

Chart 04: Shareholding Pattern

Public 7.3%

PCS Jordan LLC,

28.0%

Jordan Investment

Corporation, 26.9%

Arab Mining

Company 20.0%

Islamic Development

Bank, 5.2%

Government of Iraq,

4.7%

Libyan Arab Foreign

Investment Company

4.1%

Kuwait Investment

Authority, 4.0%

Source: Zawya

Listing & TradingThe Arab Potash Company APOT, a public shareholding company, was founded and

registered on July 7, 1956. During 1958, the Company was granted a concession from the

Government of Jordan for a period of 100 years. The Company increased its paid in capital

in December 1997 from JD 79,695,000 to JD 83,318,000. The increase was affected through

the issue of Global Depository Receipts (GDRs) on the London Stock Exchange at a price

of US$9.03 for each GDR. Each GDR represents one ordinary share with a nominal value of

JD1 per share.

Table 02: APC on the Amman Stock Exchange

Year Average Daily Volume Closing Price (JD) Market Cap (JD 000)

2005 27,097 13.0 1,083,1342006 9,394 11.0 916,498

2007 6,648 34.9 2,906,965

2008* 29,797 49.5 4,123,408

Source: Amman Stock Exchange

* Till September 2008

Arab Potash is listed under the ticker APOT on Amman Stock Exchange. In 2007, the

average daily volume traded of the stock was 6,648 shares. For the period 1st January 2008

to 7th September 2008, the average daily volume traded was 29,797 shares. The stock

closed at JD57.5 at the end of trading on 7th September 2008, with a 52-week high/low of

JD16.79/95.61.

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Global Fertilizer Industry

Between 2000-07, Global fertilizer production capacity has increased, at a CAGR of 2.8%

to 229.5mn tons in 2007. During the past 7 years, the capacity in the world fertilizer sector

has witnessed a strong y-o-y growth of 6.1% in 2004 and 5% in 2007. The major reason

for growth during these two years was a time-lag between the planning execution and

commencement of production from new expansions. Generally, an expansion takes 20-24

months for completion, while the establishment of new plant takes 30-36 months. Besides,

time duration could vary based on the availability of gas. However, during the remaining

years the y-o-y growth was restricted in the range from 1.5% to 3.2%.

Chart 05: Global Fertilizer Production Capacities

1.3%

3.2%

1.7%

5.0%

6.1%

0.0%

1.6% 1.8%

-

50.0

100.0

150.0

200.0

250.0

2000 2001 2002 2003 2004 2005 2006 2007

(mnTons)

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

World Fertilizer Capacities Growth

Source: Company Reports, IFA and FAO

Regional Fertilizer Capacities

During 2000-07, North American and East Asian regions had completely dominated the

world, in terms of production capacities. In 2007, according to International Fertilizer

Industry Association (IFA) statistics, North American and East Asian regions were standing

with the capacities of 39.6mn tons and 68.9mn tons, respectively.

Table 03: Historical Regional Fertilizer Capacities

(000 Tons) 2000 2001 2002 2003 2004 2005 2006 2007

North America 45,525 43,248 42,026 40,307 42,222 39,486 37,700 39,693

LatinAmerica 8,731 9,703 10,385 10,733 11,914 12,086 12,803 11,481

SouthAsia 16,986 17,436 16,957 17,401 18,468 17,592 18,180 17,335

EastAsia 45,109 45,748 48,148 50,794 56,265 61,864 65,990 68,906

CentralEurope 7,301 6,504 5,656 6,703 7,438 7,757 7,239 7,194

WestEurope 17,810 16,759 16,460 16,395 16,351 16,714 15,437 17,209

EastEurope&CentralAsia 25,568 25,666 26,477 27,778 29,168 30,599 31,429 37,912

Oceania 980 1,399 1,366 1,555 1,536 1,614 2,021 2,159

MENA 21,765 23,233 25,262 24,569 24,877 27,151 27,711 27,614

Total 189,775 189,696 192,737 196,235 208,239 214,863 218,510 229,503

Source: GlobalResearch, IFA & FAO

It is worth mentioning that in past 7 years, North America is the only region that has

shown a significant decline in capacity to 39.6mn tons in 2007 from 45.5mn tons in 2000.

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Consequently, the contribution of the region to the overall world capacity has declined to

17.3% in 2007 from 24.0% in 2000. This decline is mainly due to (1) higher gas prices and (2)

decline in local demand. However, on a y-o-y basis, North America capacity had registered

an increase of 5.3% in 2007. During the corresponding period, East Asian capacities hadshown an upward trend and increased at a CAGR of 6.2%, raising the East Asian regions

share to 30.0% of the total worlds capacity in 2007, as compared to 23.8% in 2000.

Table 04: Regional Contribution

(%) 2000 2001 2002 2003 2004 2005 2006 2007

North America 24.0% 22.8% 21.8% 20.5% 20.3% 18.4% 17.3% 17.3%

Latin America 4.6% 5.1% 5.4% 5.5% 5.7% 5.6% 5.9% 5.0%

South Asia 9.0% 9.2% 8.8% 8.9% 8.9% 8.2% 8.3% 7.6%

East Asia 23.8% 24.1% 25.0% 25.9% 27.0% 28.8% 30.2% 30.0%

Central Europe 3.8% 3.4% 2.9% 3.4% 3.6% 3.6% 3.3% 3.1%

West Europe 9.4% 8.8% 8.5% 8.4% 7.9% 7.8% 7.1% 7.5%East Europe & Central Asia 13.5% 13.5% 13.7% 14.2% 14.0% 14.2% 14.4% 16.5%

Oceania 0.5% 0.7% 0.7% 0.8% 0.7% 0.8% 0.9% 0.9%

MENA 11.5% 12.2% 13.1% 12.5% 11.9% 12.6% 12.7% 12.0%


Fertilizer Capacity Expansion

According to Food & Agriculture Organization of the United Nations (FAO), fertilizer

capacity, during 2007-11 is expected to increase at a CAGR of 5.0% to 278.6mn tons by

2011. The major increase in the world capacity expansion is expected to come from the

MENA region, which is expected to show 2007-11 CAGR of 19.9% to reach at 57.1mn

tons in 2011 from the current level of 27.6mn tons in 2007. In addition, the contributionfrom MENA to total world capacity is expected to reach at 20.5% in 2011 up from 12.0% in

2007.

Chart 06: Global Fertilizer Capacity Growth

5.0%

7.2%

4.2%3.9%

4.5%

-

50.0

100.0

150.0

200.0

250.0

300.0

2007 2008E 2009E 2010E 2011E

(mnTons)

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

World Fertilizer Capacities Growth

Source: GlobalResearch, IFA and FAO

Global Production of Fertilizer

Global fertilizer production, by the end of 2007, stood at 232.6mn tons. During 2000-07,

fertilizer production has increased at a CAGR of 2.2%. As North American and East Asian

regions have the highest fertilizer capacities in the world, they have unsurprisingly maintained

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their dominance in the production. However, the consumption of fertilizer remained high in

areas where agriculture is the backbone of the economy and life in general like, South Asia

and Central, East and West Africa. These countries as a result rely on the import of fertilizer

products to fulfill their local requirement.

Chart 07: Global Fertilizer Production

1.3%

3.2%

1.7%

1.1%

1.8%1.6%

0.0%

6.1%

180.0

190.0

200.0

210.0

220.0

230.0

240.0

2000 2001 2002 2003 2004 2005 2006 2007

(mnTons)

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

World Fertilizer Production Growth


Regional Fertilizer Production

According to IFA statistics, North American and East Asian regions are the two biggest

producers of fertilizers. The combined production from these regions stood at 108.6mn tons

out of the entire production of 232.6mn tons in 2007.

Table 05: Regional Fertilizer Production

(000 Tons) 2000 2001 2002 2003 2004 2005 2006 2007

North America 47,921 45,525 44,238 42,428 44,444 41,564 39,684 39,684

Latin America 9,191 10,214 10,931 11,298 12,541 12,722 13,477 13,477

South Asia 17,880 18,354 17,850 18,317 19,440 18,517 19,137 19,137

East Asia 47,484 48,155 50,682 53,468 59,226 65,120 69,463 69,463

Central Europe 7,685 6,846 5,954 7,055 7,829 8,165 7,620 7,620

West Europe 18,747 17,641 17,327 17,258 17,212 17,594 16,250 16,589

East Europe & Central Asia 26,914 27,016 27,870 29,240 30,703 32,209 33,083 32,831

Oceania 1032 1,472 1,438 1,636 1,616 1,699 2,127 2,004

MENA 22,910 24,456 26,592 25,862 26,186 28,579 29,170 31,756Total 199,763 199,679 202,882 206,562 219,198 226,170 230,012 232,562


Since production is linked with capacity, the production from the North American region

has shown a decline of y-o-y 17.2% to 39.7mn tons in 2007 as compared to 47.9mn tons in

2000. On the other hand, remarkable y-o-y growth of 46.3% and 38.6% was witnessed in

the East Asian and MENA regions. This was mainly due to (i) the intentions of Middle East

governments to reduce the economic dependence on crude oil, (ii) the abundance of natural

gas has encouraged the North African and Middle Eastern countries to invest in gas based

industries and (iii) the high demand of fertilizer in Asian countries and ample gas in China

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and Indonesia has led East Asian countries to increase the production. Consequently, the

contribution from the MENA region has lifted from 11.5% in 2000 to 13.7% in 2007 and East

Asian region has claimed 29.9% of total production in 2007 against 23.8% in 2000.

Table 06: Regional Production Contribution

(%) 2000 2001 2002 2003 2004 2005 2006 2007

North America 24.0% 22.8% 21.8% 20.5% 20.3% 18.4% 17.3% 17.1%

Latin America 4.6% 5.1% 5.4% 5.5% 5.7% 5.6% 5.9% 5.8%

South Asia 9.0% 9.2% 8.8% 8.9% 8.9% 8.2% 8.3% 8.2%

East Asia 23.8% 24.1% 25.0% 25.9% 27.0% 28.8% 30.2% 29.9%

Central Europe 3.8% 3.4% 2.9% 3.4% 3.6% 3.6% 3.3% 3.3%

West Europe 9.4% 8.8% 8.5% 8.4% 7.9% 7.8% 7.1% 7.1%

East Europe & Central Asia 13.5% 13.5% 13.7% 14.2% 14.0% 14.2% 14.4% 14.1%

Oceania 0.5% 0.7% 0.7% 0.8% 0.7% 0.8% 0.9% 0.9%

MENA 11.5% 12.2% 13.1% 12.5% 11.9% 12.6% 12.7% 13.7%


Higher Capacity Leads Production Growth...

According to FAO, world fertilizer production is expected to increase at a CAGR of 3.1% to

262.6mn tons, during the period of 2007-11. Major production growth is expected from the

MENA region, where production is expected to increase at a CAGR of 13.5%. As a result,

the region could well become the 2nd largest fertilizer producer in the world by 2011.

Table 07: Production Growth

(000 Tons) 2007 2008E 2009E 2010E 2011E

North America 39,684 39,684 39,684 39,684 39,684

Latin America 13,477 13,477 13,477 13,477 13,477

South Asia 19,137 19,137 19,137 19,137 19,137

East Asia 69,463 69,463 69,463 69,463 69,463

Central Europe 7,620 7,620 7,620 7,620 7,620

West Europe 16,589 17,209 17,209 17,209 17,209

East Europe & Central Asia 32,831 38,397 39,242 40,329 41,050

Oceania 2,004 2,209 2,209 2,209 2,209

MENA 31,756 35,268 36,542 47,872 52,764

Total 232,562 242,465 244,584 257,001 262,614


Global Fertilizer Consumption

The overall consumption of fertilizer in 2007 reached 237.4mn tons against the total

production of 232.6mn tons. Among the regions, South & East Asia regions remained the

largest consumer of fertilizer by consuming 52.5% of the total world consumption level. In

addition, the region has produced 88.6mn tons, while consuming 124.7mn tons in 2007. This

shows that these regions mostly rely on imports. Besides, South & East Asia regions, Latin

American and West European regions has witnessed a deficit of 9.6mn tons and 5.5mn tons

respectively in 2007, which were fulfilled through imports.

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Chart 08: Regional Fertilizer Consumption in 2007

East Asia, 37%

Oceania, 2%

East Europe &

Central Asia, 3%

Africa, 3%

North America,

15%

Latin America,

10%

West Aisa-ME,

3%

South Asia, 16%

Weat Europe, 9%

Central Europe,

2%


Based on FAO statistics, despite the shortage of fertilizer in Latin America, South Asia,

and East Asia regions, the global utilization rate is expected to fall from the present rate of

101.3% to 94.3% by 2011. This is mainly due to the higher increase in production capacities

at a CAGR of 4.6%, as compared to the demand CAGR of 2.4%, during 2007-11. However,

keeping the utilization rate at 100% will probably create an over supply situation by 2010.

Chart 09: Global Fertilizer Consumption Growth

101.3%

94.3%

101.7%

98.4%

96.4%

225.0

230.0

235.0

240.0

245.0

250.0

255.0

260.0

265.0

2007 2008E 2009E 2010E 2011E

(mnTons)

90.0%

92.0%

94.0%

96.0%

98.0%

100.0%

102.0%

104.0%

Fertilizer Consumption Utilization Rate


Fertilizer Product Prices

Over the last 2 years, international fertilizer prices have surged mainly due to higher feedstock

prices in North America, Europe, and East Asia. In addition, no subsidy is given in these

regions on feedstock prices. Consequently, the price of basic fertilizer chemicals in these

regions has witnessed an increase of 35.8% in phosphoric acid while Sulphuric acid prices

have jumped from US$75.1 per ton in 2005 to US$96.9 per ton in 2007. However, in the

MENA region, the feedstock gas is available at highly subsidized rates and does not depend

on the prices of gas in the international market. This is mainly due to ample production and

supply of gas in MENA region and agricultural base economy of South Asia region.

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Chart 10: Fertilizer Product Prices

-

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2005 2006 2007 2008E 2009E 2010E 2011E

(US$/Ton)

Ammonia Urea DAP


Looking ahead, the expected increase in gas prices will not allow fertilizer products prices to

come down from their present high levels, since the price of feedstock gas in the international

market is directly linked with international prices. However, the availability of gas (feedstock)

at highly subsidized prices in the MENA region, with low local consumption, will benefit

the region to earn more profits by exporting the fertilizer at international rates. Moreover,

South Asian countries have also subsidized the price of gas (feedstock) but the high local

consumption has caused these countries to rely on the import. Consequently, the region was

not be able to reap the benefit of high fertilizer prices.

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Global Potash Industry

Globally the year 2008 is proving to be another year of strong growth for the fertilizer

industry. World production of potash, the primary inputs into the fertilizer production process,continued to grow, reaching 55.7mn tons respectively in 2007, compared to production levels

of 42.6mn tons back in year 2001.

Potash production in 2007 was an all time record with almost 80% of the increase coming

from Canada and the remainder from Russia and Belarusia. Other producing regions were

reported operating at their full capacity.

Chart 11: Global Potash Demand & Supply

0

10

20

30

40

50

60

2001 2002 2003 2004 2005 2006 2007

(mnTons)

(0.5)

-

0.5

1.0

1.5

2.0

2.5

3.0

3.5

(mnTons)

Demand (LHS) Supply (LHS) Surplus/Deficit (RHS)

Source: Arab Potash Annual Reports

Potash demand and deliveries increased to 55.9mn tons of product from about 48.6mn. Theincrease was relatively large at 7.3mn tons or about 15%. A very significant development

was the fact that growth was registered in all regions and almost all countries. The largest

growth regions were Asia (22%), North America (15%), and Latin America (12%).The other

regions of the world witnessed more modest figures. The drivers for demand were the firmer

prices for agricultural commodities almost universally and support for higher acreage even

in Europe where set aside policies were reversed.

The main drivers creating tight supply & demand for potash are really quite simple.

Worlds population is growing every year. U.N. estimates are 100 million a year.

This growing population for the first time desires a higher protein diet (more meat).

Meat production is grain intensive. It takes 7 pounds of grain to produce 1 pound of beef

according to the USDA.

There is less arable land on which to grow crops as a result of the growing population.

Therefore, in order for countries to feed their hungry populations they must increase the

yields and efficiency of the farm land already in use. This is done in part by use of fertilizers

such as potash.

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The Bio Fuel factor did play a role in the overall demand but estimates of the real significance

of this sector in the use of potash fertilizer vary from 2-3% in the current decade, with some

projections of 5% of total Potash demand in the middle of the next decade. Potash deliveries

were higher to China where imports are estimated to have risen by more than 28%. A similargrowth rate was registered in India. There were also sharp increases of deliveries to Brazil

and the United States. Demand also improved in Europe after a decade of reduced fertilizer

use.

Going forward, the global production of the commodity could rise to as high as 85bn gallons

per annum by 2015 from the current 30bn gallons per annum.

Chart 12: World Potash Prices (US$/Ton)

-

100

200

300

400500

600

700

2003

2004

2005

2006

2007

2008*

Jan-08

Feb-08

Mar-08

Apr-08

May-08

Jun-08

Jul-08

Aug-08

0%

20%

40%

60%

80%

100%

120%

140%

160%

Annual Potash Price (LHS) Annual Growth (RHS)

Monthly Growth (RHS) Monthly Potash Prices (LHS)

Source: World Bank Pink Sheets

*Average (Jan-August)

During 2007, potash market prices remained favorable for suppliers. In 2007, average global

potash price was US$200.2/ton as compared to US$174.5/ton in 2006.However the same for

the year 2008 (Jan-August) has gone significantly to as high as US$479.6/ton, an increase

of 140%.

The commodity price surge which motivated farmers to increase efficiency by balanced

nutrient use is viewed as a structural adjustment as the worlds population becomes more

prosperous and requires better and more diversified food. This demand growth resulted in

record low grain inventories estimated at approximately 57 days of consumption.

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Chart 13: World Potash Price Forecasts (US$/Ton)

-

200.0

400.0

600.0

800.0

1,000.0

1,200.0

1,400.0

1,600.0

2008F 2009F 2010F 2011F 2012F

0%

20%

40%

60%

80%

100%

120%

Price Growth

Source: GlobalResearch

Indian and Chinese contract prices of Potash effective July 1, 2008 has risen to US$625/ton

and US$580/ton respectively. While spot market prices for deliveries in fourth quarter are

US$1000/ton. These price increases are driven by the continuous growth of global demand,

historically low inventory levels and unprecedented tightening of the supply for the remainder

of 2008 after the agreements reached by the Company in China and India.

Going forward, the tightness of the supply/demand balance of potash and phosphate will

begin to ease by 2011. As per the management and the industry source, the average annual

price is expected to come to JD286/ton (US$405/ton), which for the year 2009, would peak

to JD600/ton (US$850/ton) and by the end of 2012, the price would ease down at JD990/ton

(US$1400/ton).

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Jordan Potash Industry

Jordan is a country rich in potash deposits. Total production of potash in 2007 reached 1.79mn

tons, as per the Central Bank of Jordan. Potash is used in the production of fertilizers. The

country is therefore a major DAP fertilizer exporter and it exports to more than 25 countries,

but mainly to India, Japan and Pakistan, while the Japanese market is the main exporter of

the Jordanian NPK.

Chart 14: Jordan Potash Exports as % of Total Manufacturing Exports

-

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

2002 2003 2004 2005 2006 2007

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

Potash Exports (JD 000) Exports of Manf. Goods Potash as % of Total Manf.

Source: Central Bank of Jordan

On the whole, the value added to GDP by the mining and quarrying sector has been

continuously declining, despite soaring prices. The contribution to the real GDP is around

JD128mn as compared to JD130mn in 2006. This drop is attributable to the continuous

decline in production of these minerals, with phosphate production declining by 13% andpotash declining by 2%.

Chart 15: Jordan Potash Export Distribution by Region

India, 26%

China, 17%Others, 16%

Malaysia &

Indonesia, 19%

Asia, 13%

Europe &

Africa, 9%

Source: Annual Report of APC

Arab Potash Company is the only company dedicated for the production of Potash in Jordan.

Over the years Jordan has exported more than 90% of its products to countries like China,

India, Malaysia, Indonesia and other Asian countries. The country could be able to export

and earn more as APOT is undergoing expansion and the full year impact would come in

2010, whereby it could be able to produce more than 2.4mn tons of Potash.

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Competitors Profle

The Mosaic Company

Mosaic is one of the worlds leading producers and marketers of concentrated phosphateand potash as well as a supplier of nitrogen, all of which are vital crop nutrients. Its potash

production capabilities are the second-largest in the world, with an annual capacity of

approximately 10.4mn tons. They operate four mines within Saskatchewan, Canada,

including the worlds largest potash mine, as well as a mine in New Mexico. North America

receives about 56% of their shipments. The remainder is exported to other regions of the

world. Their global market share of potash is approximately 15%. Their production of 7.9mn

tons of potash for fiscal 2007 accounted for approximately 15% of world production and 40%

of North American production.

Chart 16: Potash Production by Mosaic

(mnTons)

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

2004 2005 2006 2007

Source: APC Annual Reports

Belaruskali

Belaruskali is second largest producer of Potash. Functioning on the basis of the Starobin

deposit of the potash salts, PA Belaruskali comprises the four mine and refinery complexes,

auxiliary shops and servicing units which employ about 20 000 persons. Each of the four mine

and refinery complexes comprises a mine to mine the potash ore and the dressing factory to

process it and to produce the mineral potash fertilizers in the form of fine, fine crystallized and

granulated concentrate of the potassium chloride. Except this, the Amalgamation produces

the cooking salt, technical salt, edible salt and feeding salt.

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Chart 17: Potash Production by Belruskali

(mnTons)

7.3

7.4

7.5

7.6

7.7

7.8

7.9

8.0

8.1

8.2

8.3

2004 2005 2006 2007

Source: APC Annual Reports

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APOT Performance Overview

Recent Developments in Arab Potash Company

Aqaba Development Corporation signed a 30-year Build, Operate and Transfer (BOT)agreement with Jordan Phosphate Mines Company (JPMC) and the Arab Potash Company

(APOT), the two main users of the Industrial Terminal, to rehabilitate, develop, and

operate the current Industrial Terminal as well as establish and operate a new terminal on

a B.O.T basis at an Investment of US$100mn.

Arab Potash Company announced that its Board of Directors has approved the closure

of its Salt Unit. The Company has reached an agreement with the General Federation of

Jordanian Trade Unions and the Ministry of Labor, under which it will pay a severance

package of JD3mn to approximately 140 Salt Unit employees. Around 60 Salt Unit

employees will be absorbed into the potash operations.

Arab Potash Company announced that it will enter a joint venture with Jordan Petroleum

Refinery Company to establish a new company, which will invest JD70mn to rehabilitate

the existing jetty and construct a new jetty in a period of 3 years. Both companies will

own a 50% stake in the newly established company.

The company announced that it is planning to sell from 40% up to 100% of its stake in

Arab Fertilizers and Chemicals Industries to local or foreign investors.

Financial Performance in 2007

Sales RevenueThe Companys sales revenue increased by 41% in 2007 to JD291mn as compared to

JD207mn in 2006, an increase of over 40%. This increase was possible because of increase

in the sales volume which was also aided by the rising prices. During 2007, the company was

able to sell 1.85mn tons of Potash, higher by 13% as compared to that in 2006. During 2007,

the Potash price increased by 8% to JD136/ton as compared to JD126/ton in 2006.

Chart 18: Revenue Contribution

-

50,000

100,000

150,000

200,000

250,000

300,000

350,000

2004 2005 2006 2007

(JD0

00)

Potash Sales Revenue Numeria Company Revenue KEMAPCO Revenue


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Potash exports amounted to 90% of the total sales, out of which a majority was exported

to India and China. Sales to India amounted to 29% of the total exports while the same for

China was 19%. Other major destinations for Potash were Malaysia and Indonesia. Revenue

earned by Numeria and KEMPACO amounted to 13% of the total. Numeria revenue declinedto JD0.368mn in 2007 from JD0.523mn in 2006. While this was the first time when revenue

from KEMPACO was added to the top line. KEMPACO added almost 13% to the total at

JD37.8mn.

Gross Profit

In 2007, the Companys cost of sales rose by 28% to JD154mn as compared to JD120mn

in 2006. Cost of Potash business declined during the year and the company was able to

complement its potash margins by 9% to 51% from 42% in 2006. On the other hand the

margins of Numeria declined heavily to as low as 8% from 41% a year ago. Margins of

KEMPACO remained at 22% for 2007. On the whole the Potash business added 81% to the

total cost while KEMPACO added 19% to the total.

Chart 19: Cost Contributions

-

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

2004 2005 2006 2007

(JD0

00)

Arab Potash Company Cost Numeria Company Cost KEMAPCO Cost


As a result of lesser growth in cost of sales as compared to that of revenue, the gross profit

rose by 57% to JD137mn as compared to JD87mn in 2006. During the year the margins of

the company increased to 47% from 42% in 2006. This growth in margins was because of the

extraordinary increase in the margins of Potash business.

Operating Expense & ProfitThe Companys operating expense on the whole rose by 40% to JD33.6mn in 2007 as

compared to JD24mn in 2006. Selling and distribution expense increased by 98% to JD12.5mn

while general and administrative expense increased by 36% to JD7.1mn. The Royalty to the

Government of Jordan amounted JD13.9mn compared to JD12.4mn in 2006, an increase

of 12.1%, representing 4.8% of consolidated sales revenue for 2007 against 6.0% for 2006.

Under the terms of the concession, the Government of Jordan is entitled to a royalty of JD 8

for each ton of potassium chloride, (Potash) exported by the Company which recently has

been raised to JD15/ton effective March 2008. The maximum royalty payable is limited to

25% of the Companys profit for the year. As a result, the company operating profit rose by

64% to JD103mn (Operating Margins: 35.5%) as compared to JD63mn (Operating Margins:

30.5%) in 2006.

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September 2008 Arab Potash Company 2

Other Revenues

The company earns other income from varied sources which include: interest & commission

income, return on cash deposits, foreign exchange activities and share of profit from associates.

In 2007, huge profits were earned from these sources which amounted to JD75.8mn as

compared to JD6.9mn in 2006. During the year, company profit from associates amounted

to JD9mn as compared to JD5.6mn in 2006. In 2007, the company recorded one time gains

from gains of Jordan Magnesia Company and reversal of provision which amounted to

JD43.8mn.

Net Income

Net income of the company for the year rose from 284% to JD150mn (EPS: JD1.80) as

compared to JD39.13mn (EPS: JD0.47) in 2006. Net margins of the company rose heavily

in the wake of extraordinary income earned through other sources. As a result, the company

net margins for 2007, rose from 18.9% in 2006 to 51.5% in 2007.

Chart 20: Quarterly Revenue & Profits

-

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

1Q/2006

2Q/2006

3Q/2006

4Q/2006

1Q/2007

2Q/2007

3Q/2007

4Q/2007

1Q/2008

2Q/2008

(JD'000)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

(%)

Revenue Net Profit NPM

Source: Company Reports

During first quarter of 2007, the company earned the most at JD52.4mn at margins of 78%,

while the least profitable was the third quarter in which the company earned JD21.8mn.

Assets

The Companys assets rose by 36% to JD543mn as compared to JD400.4mn in 2006. During

the year the major increase was witnessed in the project in progress account which rose

by 111% to JD76.2mn as compared to JD36.1mn in 2006. The increase in the project was

because of the undergoing expansion of the potash business. Receivables and inventories

increased during the year by 60% and 80% to JD97.9mn and JD12.5mn in 2007. Other assets

rose significantly during 2007 to JD47.9mn.

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Chart 21: Debt to Equity

-

100,000

200,000

300,000

400,000

500,000

600,000

2003 2004 2005 2006 2007

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Assets (JD' 000) Equity as % of Assets Debt as % of Assets


Company liabilities amounted to 28% of the assets. In the total liabilities debt amounted to

43% of the total at JD66mn while the rest were the payables and other liabilities. Various

international institutions have lent funds to the company and the majority amounting to

JD36.9mn was given by Islamic Development Bank Jeddah.

Investments

The Companys investments for the year 2007 rose marginally by 4% to JD35.7mn as

compared to JD34.4mn in 2006. Majority of its investments are in the associates which

amount to 97% of the total. Available for Sale Investments amount to only 3% of the total

investments. Company investments as percentage to assets declined from 9% in 2006 to 7%

in 2007.

Chart 22: Investments as % of Assets

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

2003 2004 2005 2006 2007

(JD'000)

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

(%)

Investments Investment Income as % of Assets


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Gross Margins (%)

40%

43%

46%

49%

52%

55%

2003 2004 2005 2006 2007

Net Margins (%)

-40%

-25%

-10%

5%

20%

35%

50%

2003 2004 2005 2006 2007

Debt to Equity (%)

15%

20%

25%

30%

35%

40%

2003 2004 2005 2006 2007

Operating Margins (%)

20%

24%

28%

32%

36%

40%

2003 2004 2005 2006 2007

Return on Avg. Assets (%)

-20%

-13%

-6%

1%

8%

15%

22%

2003 2004 2005 2006 2007

Return on Avg. Equity (%)

-25%

-15%

-5%

5%

15%

25%

35%

2003 2004 2005 2006 2007

Assets (JD ' 000)

300,000

350,000

400,000

450,000

500,000

550,000

2003 2004 2005 2006 2007

Net Profit (JD ' 000)

(55,000)

(30,000)

(5,000)

20,000

45,000

70,000

95,000

120,000

145,000

2003 2004 2005 2006 2007

P/Bv Ratio (x)

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

2003 2004 2005 2006 2007

P/E Ratio (x)

(10.0)

-

10.0

20.0

30.0

40.0

2003 2004 2005 2006 2007

Chart Gallery

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1H-2008 Performance

The Companys sales revenue for the half year period of 2008 rose by 70.8% to JD234.7mn

as compared to JD137.4mn in the same period of 2007. Potash sales volumes in the first half

of 2008 were 0.93mn tons as compared to 0.93mn tons in 2007, virtually unchanged from

the same period last year. Average sales prices in the first half of 2008 were 65% higher than

in the same period last year. These higher prices resulted in a JD80.0mn increase in potash

sales revenue on a y-o-y basis. The Company sold 85k tons of potassium nitrate (NOP)

and di-calcium phosphate (DCP) during the period which resulted in sales revenues of

JD35.7mn.

Potash cost of sales on a per ton basis increased by 40% as compared to the first six months

of 2007 primarily due to increased energy and freight costs. The higher sales prices more than

offset the increased costs on a per ton basis resulting in an increase in gross profit from potash

of JD52.7mn or 88%. On the whole gross profit rose by 96% to JD126mn (Gross Margins:

54%) as compared to JD64.6mn (Gross Margins: 47%) in 1H-2007.

Table 08: Arab Potash Company - Interim Results

(JD 000) 1H-2007 1H-2008 % Change

Sales Revenue 137,460 234,787 70.8%

Cost of Sales (72,842) (108,138) 48.5%

Gross Profit 64,618 126,649 96.0%

Operational Expenses (18,148) (22,195) 22.3%

Operating Profit 46,470 104,454 124.8%

Other Revenue 64,949 7,907 -87.8%

Financial Charges (1,907) (1,983) 4.0%Other Expense (1,428) (6,320) 343%

Profit Before Zakat 108,084 104,058 -3.7%

Income Tax (10,108) (13,992) 38.4%

Net Profit 97,976 90,066 -8.1%

2007 1H-2008 % Change

Equity 388,961 420,752 23.5%

Liability 154,263 145,446 36.4%

Assets 543,224 566,198 26.4%

Debt 66,024 62,169 -6%

Debt as % of Assets 12% 11.0%

Investments 35,747 36,184 1%

Investments as % of Assets 7% 6%


Potash selling and distribution expense during the first six months of 2008 as compared to

2007 increased by JD0.6mn (14%). Selling expenses related to KEMPACO were JD2.0mn in

the period. Administrative expenses increased by JD0.7mn (19%) primarily due to increased

legal costs. KEMPACOs administration expenses for the period were JD0.1mn. The royalty

to the Government of Jordan increased by JD3.7mn (53%) due to an increase in the royalty

from JD 8 per exported ton to JD15 per exported ton which was effective from March 17,

2008.

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Finance costs recorded a marginal 4% rise during the first half of 2008, to reach JOD1.98mn

up from JD1.91mn in 1H-2007. Finance expenses were considerably high in 2007 due to the

consolidation with KEMAPCO; these increased by 86% to settle in at JD4.2mn compared to

JOD2.3mn in 2006.

The reason for a decline in the other revenue earned by Arab Potash in the second quarter

of 2007 was that the Company received a settlement related to the Jormag litigation that

resulted in a net gain of JD24.9mn in 2007. In addition, the Company had recorded a gain

of JD30.9mn in the first quarter of 2007 related to the transaction whereby the Company

purchased the remaining 50% of the shares of KEMPACO from Kemira Agro. These one-

time gains were not repeated in the first half of 2008.

Profit before tax was JD104.1mn as compared to JD 108.1mn in the first half of last year.

The significant improvement in income from continuing operations almost completely offset

the reduction in one-time gains realized in 2007. On the whole, the Company reported net

income of JD90.1mn (EPS: JD1.08) for the first half of 2008 as compared to JD98.0mn

(EPS: JD1.17) in the same period of 2007.

During the half year period, the net assets of the company increased by 26.4% to JD566mn

as compared to JD543mn at the end of 2007.

During the 1H-2008, the projects under progress increased by 29% to JD98.3mn up from

JD76.3mn in 2007. The figure pertains to the expansion plans taking place aiming at

increasing the companys production capacity by 0.5mn tons to reach 2.4mn tons.

The company equity proportion to that of sales rose from 72% at the end of 2007 to 74% at

the end of the half year period. Total debt amounted to JD62mn as compared to JD66mn at

the end of 2007. The company reduced its debt as a percentage of assets to 11% from 12%

last year.

The Company has reached agreement with major customers in India (IPL and Zuari) regarding

tonnages and prices for the remainder of this year and first quarter of 2009. Quantities will

approximate 600,000tons at base prices that are approximately US$355/ton higher (US$625/

ton CFR). In addition, the Company reached an agreement with Sinochem to supply it with

200,000tons during the remainder of 2008 at prices that are US$400/ton higher.

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Outlook

Arab Potash Company is expected to remain buoyant. Global prices for potash are not

expected to ease any time soon, as strong global demand for fertilizers has intensified drivenby the population and economic growth in emerging economies such as India and China.

In addition, government mandates for bio-fuel production, and higher urbanization and

deforestation rates contributed to increased demand. According to the International Fertilizer

Association (IFA), fertilizer production rose by approximately 10% each year between 2004

and 2007 and demand for potash and phosphate fertilizers are estimated to rise by 3.4% and

2.8% per annum respectively for the next several years.

Looking at the international demand and supply scenario, the demand is outstripping supply

for both potash and phosphates. This led to a continuous price rises of potash and phosphates,

including rock phosphate, throughout 2007, both of which are currently at all time highs. On

the other hand, world demand for potash and phosphate fertilizers exceeds supply. Given thefact that the development of new production capacity requires approximately a multi-year

process, supply constraints are expected to continue through the medium term.

APOTs management believes that the price will continue to increase and the average prices

of Potash would be over JD650/ton in 2009 but we have remained slightly conservative and

forecasted the price at JD600/ton.

Chart 23: Increasing Revenue

-

500,000

1,000,000

1,500,000

2,000,000

2,500,000

2008 (F) 2009 (F) 2010 (F) 2011 (F)

(JD0

00)

Potash Sales Revenue Numeria Company Revenue KEMAPCO Revenue


The Company currently produces 1.9mn tons of potash, and is undergoing expansion by

0.5mn tons which is scheduled to come online by second half of 2009. This would raise total

production capacity to 2.4mn tons by end of 2009. The Company is currently studying the

possibility of further expanding its capacity by another 0.5mn tons. However, this is still in

the tentative stage and thats why we have not factored it into our forecast.

The contribution to the sales revenue would be dominated by the Companys Potash business

and with the ever rising prices the average contribution in the revenue of the company would

average around 90% for 2008-2011. On the other hand cost contribution would average

around 83% during the period.

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The company recently signed a 30-year Build, Operate and Transfer (BOT) agreement with

Jordan Phosphate Mines Company (JPMC) and the Arab Potash Company (APOT), the

two main users of the Industrial Terminal, to rehabilitate, develop, and operate the current

Industrial Terminal as well as establish and operate a new terminal on a B.O.T basis at anInvestment of US$100mn. The investment would result in cost reduction for the Company

and would make process easier for the Company to channel out its produce.

Chart 24: EV/EBITDA

-

500,0001,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

4,500,000

2007 2008 (F) 2009 (F) 2010 (F) 2011 (F)

-

2.04.0

6.0

8.0

10.0

12.0

14.0

16.0

EBITDA (JD 000) EV (JD 000) EV/EBITDA (x)


The company is also expected to earn through the joint venture with Jordan Petroleum Refinery

Company which aims to establish a new company, which will further invest JD70mn to

rehabilitate the existing jetty and construct a new jetty in a period of 3 years. Both companies

will own a 50% stake in the newly established company.

Recently, the company announced that it is planning to sell from 40% up to 100% of its

stake in Arab Fertilizers and Chemicals Industries to local or foreign investors. This has not

materialized so far and thats why we havent incorporated it in our forecasts.

On the whole, the company is a great combination of core incomes through varied business

with a cushion from the non-core income and investments.

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Valuation and Recommendation

DCF Method

In order to compute the cost of equity for the Discounted Cash Flow (DCF) method, we haveused the Capital Asset Pricing Model (CAPM).

The following assumptions have been made in order to arrive at the DCF value of Arab

Potash Company.

A risk-free rate of 7.03%, has been assumed.

A market risk premium of 5.5% has been assumed.

Beta has been assumed at 1.0.

The cost of equity derived from the above assumptions using the Capital Asset Pricing

Model (CAPM) is 12.53%.

The cost of debt has been assumed at 5%.

Based on the above assumptions, the Weighted Average Cost of Capital (WACC) works

out to be 10.3%.

Terminal growth rate of 3.0% has been assumed, as it is expected to follow the long-term

GDP growth in the region.

Based on our future earnings projections and the above assumptions for DCF computations,

the DCF value of Arab Potash comes out to be JD70 per share.

Table 09: DCF Valuation of Arab Potash Company

(JD 000) 2008 (F) 2009 (F) 2010 (F) 2011 (F)

Free Cash Flow 58,552 164,646 351,678 481,373

Discounted Cash Flows 57,020 145,403 281,647 349,607

WACC 10.3%

Terminal Growth Rate 3.0%

Primary Value 833,677

Terminal Value 6,819,059

Investments 36,184.0 (As of 1H-2008)

Cash 71,098.0 (As of 1H-2008)

Debt 61,997.0 (As of 1H-2008)

Enterprise Value 5,893,449

Equity Value 5,831,452

No. of Equity Shares Outstanding (mn) 83,318

Per Share Value (SR) 70


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Sensitivity Analysis

A sensitivity analysis for different estimated long-run future growth rates and weighted cost

of capital is shown in table below. The table provides estimated fair values for APOTs

shares based on a range of varying inputs. The shaded area at the center shows the most

probable range of alternatives.

Table 10: Sensitivity Analysis of Arab Potash Company

Terminal Growth Rate

WACC

1.0% 2.0% 3.0% 4.0% 5.0%

8.3% 73 83 98 119 154

9.3% 64 71 82 96 117

10.3% 56 62 70 80 94

11.3% 50 55 61 69 79

12.3% 46 49 54 60 67


Relative Valuation Method

The peer group valuation is performed to compare the intrinsic value of Arab Potash Company

arrived at using the DCF calculation. In order to value APOT using this method, we have used

the weighted average price-to-earnings (P/E) multiple for a basket of comparable companies,

which make up the peer set for APOT. The price-earnings multiple of a stock is a reflection

of various factors, such as the expected profitability of the company, its growth potential as

perceived by the market, predictability and sustainability of its revenues, the quality of its

earnings and the quality of its management, among others.

To arrive at the peer-set P/E multiple, we have computed the weighted average P/E of thethree companies.

The weighted average forward P/E for the peer set, thus arrived at, is 9.0x. On the basis of

the weighted average forward P/E for the peer set and APOTs projected 2008 earnings, the

companys stock valuation comes to JD27 per share. However, as the price-earnings multiple

varies with time and is dependent on several factors, such as market sentiment and other

qualitative factors, we have provided a lower weightage of 20% to the peer valuation method,

and 80% weightage to the value arrived at using the DCF method.

Valuation

The value of APOTs shares derived from the weighted average of the DCF and relativevaluation methods is JD61 per share. The stock closed at JD49.49 on the Amman Stock

Exchange at the end of trading on 23rd September 2008, which implies that the weighted

average value of APOTs shares is at a premium of 24.2% to the shares current market

price.

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Table 11: Weighted Average Share Value of Arab Potash Company

Weightage Fair Value

As per DCF Method 80% 70

As per P/E Multiple 20% 27

Weighted Average Share Value (JD) 61


At their current price, APOTs shares have a P/E multiple of 18.1x and 8.2x for 2008 and

2009 respectively. We therefore recommend a BUY on the Arab Potash Companys stock

at its prevailing price levels.

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INCOMESTATEMENT

TheArabPotashC

ompany

(JD000)

2005

2006

2007

2008(F)

2009(F)

2010(F)

2011(F)

NetSalesRevenue

224,396

207,256

291,436

617,020

1,279,884

1,687,227

2,024,640

CostofSales

(109,511)

(120,127)

(154,310)

(297,48

8)

(594,052)

(769,504)

(941,801)

GrossProfit

114,885

87,129

137,126

319,5

32

685,832

917,723

1,082,838

SellingandDistributionExpense

(8,263)

(6,351)

(12,587)

(22,75

9)

(47,236)

(65,791)

(76,116)

General&AdministrativeExpense

(5,694)

(5,287)

(7,177)

(15,53

1)

(32,128)

(42,124)

(50,777)

RoyalitytoGovernmentofJordan

(14,392)

(12,364)

(13,933)

(22,23

0)

(26,123)

(27,540)

(27,540)

OperatingProfit

86,536

63,127

103,429

259,0

12

580,346

782,269

928,405

Interest&CommissionIncome

4,650

6,271

7,403

7,167

6,289

9,432

25,815

OtherIncome

825

2,516

5,495

6,143

5,391

8,084

18,439

OtherExpenses

(2,465)

(6,671)

(7,427)

(12,01

9)

(12,799)

(16,872)

(20,246)

Gain/(Loss)onForex

(4,513)

1,947

2,276

-

-

-

-

EndofServiceIndemnityProvision

(8,617)

(1,225)

-

-

-

-

-

FinancialCharges

(2,197)

(2,259)

(4,199)

(3,49

3)

(2,799)

-

-

Gain/(Loss)onInvestmentsinAssociates

4,193

-

-

-

-

-

-

ProfitBeforeExceptionalGain/(Loss)

78,412

63,706

106,977

256,8

11

576,429

782,912

952,413

ShareofProfitfromAssociates

-

5,630

9,051

11,314

13,011

14,312

15,743

OtherGains&Losses

(23,236)

(20,255)

51,616

(43

4)

-

-

-

ProfitBeforeTax

55,176

49,081

167,644

267,6

91

589,439

797,224

968,156

ProvisionforIncomeTax

(12,122)

(9,942)

(17,453)

(40,15

4)

(88,416)

(119,584)

(145,223)

ProfitAfterTax

43,054

39,138

150,191

227,5

37

501,023

677,641

822,933

P&LAppropriationAccount:

Op.BalanceofRetainedEarnings

58

43,112

53,088

174,119

335,002

761,039

1,355,362

NetProfitfortheYear

43,054

39,138

150,191

227,537

501,023

677,641

822,933

ProposedDividend

-

(29,161)

(29,161)

(66,65

4)

(74,986)

(83,318)

(83,318)

ClosingBalanceofRetainedEarnings

43,112

53,089

174,119

335,0

02

761,039

1,355,362

2,094,976

Source:CompanyReports&GlobalResearch

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CASHFLOWS

TATEMENT

TheArabPotash

Company

(JD000)

2005

2006

2007

2008

(F)

2009(F)

2010(F)

2011(F)

OPERATINGACTIVITIES

ProfitfortheYear

43,054

39,138

150,191

227,537

501,023

677,641

822,933

Depriciation

22,424

22,885

20,937

23,866

25,564

26,953

29,215

OtherIncome

(5,155)

(10,734)

(15,174)

(13,310)

(11,680)

(17,516)

(44,254)

UnexceptionalGain/Losses

23,236

14,625

(60,667)

(10,880)

(13,011)

(14,312)

(15,743)

FinancialCharges

2,197

2,259

4,199

3,493

2,799

-

-

ChangeinWC

(29,653)

(8,374)

(45,646)

(31,565)

(209,260)

(223,659)

(221,340)

CashFlowFromOperations

56,103

59,799

53,840

199

,140

295,435

449,106

570,810

INVESTINGACTIVITIES

Plant&Property

(29,636)

(42,017)

(72,071)

(140,588)

(130,789)

(97,429)

(89,437)

InvestmentinAssociates

(4,045)

(3,863)

(1,124)

(3,714)

(5,762)

(8,835)

(13,252)

AvailableforSaleInvestments

(59)

117

(163)

(210)

(277)

(200,384)

(56,537)

OtherIncome

5,155

10,734

15,174

13,310

11,680

17,516

44,254

OtherInvestingActivities

1,583

(1,475)

(4,098)

(12,652)

(51,550)

(21,859)

(20,359)

CashFlowsfromInvestingActivities

(27,002)

(36,504)

(62,282)

(143,853)

(176,698)

(310,990)

(135,331)

FINANCINGACTIVITIES

LongTermLoans

(13,299)

(9,265)

14,848

(13,338)

(8,003)

(32,011)

-

FinancialCharges

(2,197)

(2,259)

(4,199)

(3,493)

(2,799)

-

-

DividendPaid

(16,664)

(29,161)

(29,161)

(66,654)

(74,986)

(83,318)

(83,318)

OtherFinancingActivities

3,574

(27,365)

37,264

15,661

11,944

211,258

(127,833)

CashFlowsfromFinancingActivities

(28,586)

(68,050)

18,752

(67,824)

(73,843)

95,930

(211,151)

CashBalance-Beginning

136,313

136,828

92,074

102,384

89,847

134,740

368,786

Increase/DecreaseinCash

515

(44,755)

10,310

(12,537)

44,893

234,046

224,328

CashBalance-Ending

136,828

92,073

102,384

89,847

134,740

368,786

593,114


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FACTSHEET

TheArabPotashC

ompany

2005

2006

2007

2008(F)

2009(F)

2010(F)

2011(F)

LiquidityRatios

CurrentRatio(x)

3.7

3.2

3.1

3

.0

4.2

7.1

9.6

QuickRatio(x)

3.6

3.1

3.0

2

.7

3.6

6.2

8.5

InventoryStock(Days)

11

17

23

23

33

49

57

ReceivablesOutstanding(Days)

70

106

100

59

40

49

60

LengthofOperatingCycle(Days)

81

123

123

82

72

98

117

PayablesOutstanding(Days)

35

43

52

41

33

34

30

LengthofCashCycle(Days)

46

80

70

41

39

64

87

ProfitabilityRatios

TotalAssetsTurnover(x)

0.6

0.4

0.5

0

.7

0.8

0.8

1.6

TotalNetFixedAssetsTurnover(x)

2.3

2.0

2.6

5

.0

9.0

10.3

22.9

EquityTurnover(x)

2.7

2.5

3.5

7

.4

15.4

20.3

48.6

GrossProfitMargin(%)

51%

42%

47%

52

%

54%

54%

54%

OperatingMargin(%)

39%

31%

36%

42

%

45%

46%

46%

NetProfitMargin(%)

19%

19%

52%

37

%

39%

40%

41%

ReturnonAverageAssets(%)

11%

8%

24%

24

%

32%

30%

65%

ReturnonAverageEquity(%)

16%

12%

32%

30

%

37%

33%

70%

ActivityRatios

InventoryTurnoverRatio(x)

32.3

21.3

15.9

16

.1

11.2

7.4

6.4

DebtorturnoverRatio(x)

5.2

3.4

3.7

6

.2

9.2

7.5

6.1

CreditorsTurnoverRatio(x)

10.3

8.5

7.0

9

.0

11.1

10.7

12.1

LeverageRatios

CurrentLiability/Equity(x)

0.24

0.22

0.23

0.19

0.15

0.08

0.07

Debt/Equity(x)

0.23

0.18

0.17

0.09

0.04

0.00

0.00

RatiosUsedforValuation

EPS(JD)

0.52

0.47

1.80

2.73

6.01

8.13

9.88

BookValuePerShare(JD)

3.09

3.21

4.67

6.60

11.71

21.25

28.40

DividendPayout(%)

0%

35%

35%

80

%

90%

100%

100%

MarketPrice(JD)*

13.00

11.00

34.89

49.49

49.49

49.49

49.49

MarketCapitalization(JD000)

1,083,134

916,498

2,906,965

4,123,408

4,123,408

4,123,408

4,123,408

P/ERatio(x)

25.2

23.4

19.4

18

.1

8.2

6.1

5.0

P/BV(x)

4.2

3.4

7.5

7

.5

4.2

2.3

1.7


**HistoricalP/E&P/BVmultiplespertainto

respectiveyear-endprices,whilethoseforfutureyearsarebasedonclosingpricesontheA

mmanStockExchangeasof23rdSeptember,

2008.

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Company

Arab Potash Company (APOT)

Recommendation

BUY

Ticker

APOT.ASE

Price

JD49.49

Disclosure

1,10

Disclosure Checklist

1. Global Investment House did not receive and will not receive any compensation from the company

or anyone else for the preparation of this report.

2. The company being researched holds more than 5% stake in Global Investment House.

3. Global Investment House makes a market in securities issued by this company.

4. Global Investment House acts as a corporate broker or sponsor to this company.

5. The author of or an individual who assisted in the preparation of this report (or a member of his/her

household) has a direct ownership position in securities issued by this company.

6. An employee of Global Investment House serves on the board of directors of this company.

7. Within the past year , Global Investment House has managed or co-managed a public offering for

this company, for which it received fees.

8. Global Investment House has received compensation from this company for the provision of

investment banking or financial advisory services within the past year.

9. Global Investment House expects to receive or intends to seek compensation for investment banking

services from this company in the next three months.

10. Please see special footnote below for other relevant disclosures.

The following is a comprehensive list of disclosures which may or may not apply to all our researches.

Only the relevant disclosures which apply to this particular research has been mentioned in the tablebelow under the heading of disclosure.

Global Rating

Buy

Global Research: Equity Ratings Definitions

Hold

Reduce

Sell

Definition

Fair value of the stock is >10% from the current market priceFair value of the stock is between +10% and -10% from the current market price

Fair value of the stock is between -10% and -20% from the current market price

Fair value of the stock is < -20% from the current market price

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APOT Initial 092008