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Arab Potash Company (APOT) Q3 2011 Update

November 29, 2011

Awraq Investments www.awraq.com Tel: 962 6 550 3803 Fax: 962 6 550 3801 Toll Free: 080022248 P.O. Box 925102 Amman 11110 Jordan

Company Brief

Arab Potash Company (Ticker: APOT) is a Jordanian company with a capital of 83.318million Jordanian Dinars, the company benefits from a 100 years concession from theJordanian Government allowing the company to exploit, manufacture and market the mineral

resources of the dead sea, the concession will last up until the year 2058. The companyfocuses on the production of potash and currently holds a 3.6% share of the global marketshare.

The company has completed the expansion of its factory during year 2010, now the companyoperates under the capacity of 2.45 MMT annually, and is currently studying furtherexpansion through a project that is estimated to cost around JD 800 million to JD 1 billionwhich is rumored to increase the capacity by 1 MMT annually.

Company Sales and Profitability

The sales of the company has witnessed a sharp increase in year 2010, even surpassing theprevious sales record of year 2008 that amounted to 1,89MMT to reach 2.08 MMT in year

2010. This can be attributed to the fact that consumption of grains was higher than productionwhich raised the price of grains and increased the demand for fertilizers, in addition to thefact that application rates of fertilizers in years 2008 and 2009 were low and inventories werelimited, causing the demand for fertilizers to soar during the year 2010.

Figure 2: Quarterly Potash Sales (JD million)

Source: Arab Potash Company

Sales revenue has improved during year 2010 reaching JD 559 million which is higher than2009 revenues of JD374 million but still not as high as the record sales of year 2008 of JD668 million due to lower selling prices in year 2010. Sales during the first three quarters ofyear 2011 are picking up where total revenues amounted to JD 555 million. The net incomeafter tax for the three quarters of year 2011 amounted to JD 217 Million, an 84.8% increasefrom net income of the same period during 2010 which was JD 117.5 million. The net profitmargin is around 39% which is higher than 2010 net margin of 29%.

Earnings per share reached JD 2.605 for the first three quarters of year 2011 compared to JD1.410 during the first three quarters of year 2010.

62 58 61

74 77

121

201 196

67 67

115

97

113

173

139

158147

188

220

0

50

100

150

200

250

J

Dmillion

Quarterly Potash Sales (JD million)


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Figure 3: Consolidated Sales, Net Profit and Net Profit Margin


Utilization of capacity and cost of sales

The production in the first three quarters of year 2011 amounted to 1.674 MMT compared to1.350 MMT for the same period during year 2010 and higher by %2.4 of the estimatedproduction plan. The company's utilization rate is expected to reach 90% of capacity, whichwill be higher than the historical five year average of 85%. It is worth noting that the

company was able to achieve such high utilization rates in 2011, whilst increasing capacity to2.45 MMT.

Cost of sales was around JD 154 per ton during the first three quarters of year 2011, which issimilar to year 2010 cost per ton and lowers than the JD 164 cost per ton for the year 2009

Figure 4: Cost of Sales Figure 5: Quantity Produced Per Quarter

ource: Arab Potash Company Source: Arab Potash Company

186225

207

291

668

374

559 555

27 43 39

150

311

132163

21714%

19% 19%

52%

47%

35%

28%

39%

0%

10%

20%

30%

40%

50%

60%

0

100

200

300

400

500

600

700

800

JDmillion

Consolidated Sales Net Profit Net Profit Margin

45

5262

73

83

115

163

144153

47

5261

71

86109

142

154 155

0

20

40

60

80

100

120

140

160

180

Cost of sales Per Ton

Cost of sales / quantity produced

453467453424

474501

542

488485

400

8

207

314

570

466

592561577

535

0

100

200

300

400

500

600

700

Thousand

Tons

Quantity produced


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Company financing

The company maintained its dividend distribution policy, distributing JD 0.70 per shareduring 2008, 2009 and 2010. The company plans to finance its future projects internallywhich explains the higher retention in year 2010.The companys current capital structure is

24% debt 76% equity, the debt of the company has been decreasing during the last five yearswere it decreased from JD 66 million in year 2007 to JD 26 million in Q32011.

Total assets and total equity in year 2010 and Q3 2011

Total assets reached JD 1.126 Million as of the End of the 3rd quarter of 2011 , up from JD1,008 December 2010. Total equity increased from JD 819 million at the end of 2010 to reachJD 933 million by the end of September 2011. In the first three quarters of year 2011 ArabPotash Company had a positive operating cash flow of JD 219 million compared to theoperating cash flow during the same period in year 2010 which was JD 146 million. Totalchange in cash flows from all activities amounted to JD 100 Million compared to the negativecash flow of JD 12 million in same period in year 2010.

Figure 6: Average Potash Price and Sales Quantity


106135

175 178192

443

499

379254

339

588 575594 589

467439

409371 366 370

406433

530

2.051.94

1.81

1.64

1.86 1.89

0.98

2.08

0.430.51 0.48 0.48

0.16 0.16

0.35 0.310.37

0.630.51

0.580.51

0.61 0.58

0

1

1

2

2

3

$0

$100

$200

$300

$400

$500

$600

$700

MillionTons

Average Seling Price (US$) Sales Quantity (miilion tons)


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Arab Potash Companys StockPriceArab Potash Companys stock price witnessed notable volatility during the first three months of year 2011, ranging between 37.57 and JD 51.But during the period from April toNovember the price became more stable trading between JD 37.50 and JD 45 and it closed on

JD 41.5 in November 29, 2011. The lowest closing price was JD 37.37 recorded on March 15,2011. The company has free float of only 2.19%, which could be one of the factors thatattribute to the volatility of the stock.

As for the share prices of other potash producers internationally, all of the potash producers(excluding Arab Potash Company) listed in the table below recorded their 52 weeks low atthe beginning of the fourth quarter , while all of companies recorded their 52 weeks high inthe first quarter of year 2011.

Figure 7: Stock Prices of Potash Producers 52 Weeks

52 Week Low Date 52 Week High Date % Difference

Intrepid USD22.47 10/4/2011 USD 40.22 2/14/2011 79%

Mosaic Company USD 44.86 10/4/2011 USD 89.24 2/14/2011 99%

Potash Corp USD 41.96 10/4/2011 USD 63.20 2/14/2011 51%

K+S EUR 35.06 10/4/2011 EUR 58.85 2/15/2011 68%

Arab Potash Company JOD 35.00 11/22/2010 JOD 51.00 1/19/2011 46%

Agrium Inc. USD 63.93 10/4/2011 USD 98.02 2/14/2011 53%

Source: Bloomberg

As it can be noted from the table below, the stocks prices of most of the potash companieswere strongly correlated during the first three quarters of year 2011, except for ICL and ArabPotash Company, several reasons can attribute to the lack of correlation including thelocation of the company in the Middle East compared to the location of the other potashproducers and the low trading volume of the Arab Potash Company stock due to its low freefloat percentage. Arab Potash Companys stock price was highly correlated to Potash Corpsstock price in the past but it started deviating since 2009 year beginning, as the followingtable shows, APOT stock shows a correlation of only 0.13 to POTs stock in the first threequarters of year 2011, which further strengthens the assumption that the two stocks are nolonger correlated.

Figure 8: Correlation Coefficient for Stock Prices of Potash Producers (January 2011 September 2011)

AGU US APOT JR ICL IT IPI US MOS US POT US SDF GR

AGU US 1.00 0.19 0.26 0.67 0.74 0.81 0.44

APOT JR 0.19 1.00 0.22 0.25 0.14 0.13 0.30

ICL IT 0.38 0.22 1.00 0.37 0.38 0.32 0.41

IPI US 0.76 0.25 0.37 1.00 0.83 0.72 0.47

MOS US 0.81 0.14 0.38 0.83 1.00 0.84 0.42

POT US 0.81 0.13 0.32 0.72 0.84 1.00 0.38SDF GR 0.52 0.30 0.41 0.47 0.42 0.38 1.00

Assumptions: Stock prices included for all days of the year. Non trading days carried the previous closing price

Source: Bloomberg


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Figure 9: Correlation Coefficient between APOT and POT Stock Price

2005 2006 2007 2008 2009 2010Up to September

2011

Correlation APOT, POT StockPrice

0.26 -0.35 0.90 0.87 0.20 0.18 0.13

Source: Bloomberg

During the first nine months (of 2011) the APOT stock price has reported a correlation of0.47 with the Amman Stock Exchange Free Float Index. The stock is considered to be stablecompared to other potash producers worldwide and has maintained its strength throughout thelast six months.

Figure 10: Arab Potash Companys Stock Price vs. Amman Stock Exchange Free Float Index

Source: Bloomberg

JOD 0

JOD 20

JOD 40

JOD 60

JOD 80

JOD 100

JOD 120

0

1000

2000

3000

4000

5000

6000

ASEGe

neralFreeFloat&BanksIndices

General Index APOT Stock Price


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Valuation

The current demand for potash is increasing and companies are expanding their capacities tomatch the anticipated demand, the main concerns faced by the company are possible futureeconomic downturns which will affect the demand for grains, over supply starting from year

2014 due to all expansion projects of the potash producers, and the situation of cropsproduction and consumption. While the factors that support the positive outlook are thecurrent strong situation of the agriculture sector, potash having no real substitute, theexpected increase in demand for the bio-fuel in the future, and the high barriers of entry.

This valuation is based on the Discounted Cash Flow model. Potash prices and sales volumesare prime variables affecting the companys future cash flow. The current selling price of JD331 ($467) per MMT is expected to be maintained in during the fourth quarter of year 2011.Due to the fact that usually the selling prices of Arab Potash lag the spot prices we estimateda lower selling price than the expected JD 376 ($530) for china and JD 425 ($600) for Indiain the first quarter of 2012 for other potash producers, We assumed JD 354 ($500) for 2012;JD 379 ($535) for 2013, JD 405 ($571) for the remaining forecasted period. EstimatedEarnings per Share are JD 3.30 per share in 2011 and JD 3.78 in year 2012. We assumed thatdemand for potash will keep its current momentum and the company will be able to increaseits sales volume from 1.8 MMT in 2010 to 2.16 MMT in year 2011 and then to reach onaverage 2.27 MMT annually for the remaining forecasted period.

Figure 11: Actual and Projected Earnings per Share

Source: Arab Potash Company (Actual), Awraq Investments (Estimates)

We applied a risk free rate of 5.16%, and market return of 11%. Using Beta of 1.09, the costof equity is 11.50%. With 76% weight of equity, 24% weight of debt; and 7.18% before taxcost of debt, the Weighted Average Cost of Capital (WACC) is 10.24%. The tax rate is 14%as of 2010 according to Arab Potash Company. Based on these assumptions, the DCF methodyielded JD 44.45 per share.

The discounted cash flows (using FCFE) yielded a fair value of JD 44.45 per share for ArabPotash Company. The sensitivity analysis in Figure 12 provides the results of the weightedvaluation using different assumptions for estimated revenues. Figure 13 illustrates the

sensitivity of value to changes in Cost of Equity and the terminal growth rate.

0.52 0.47

1.8

3.74

1.58

1.95

3.30

3.784.08

4.39 4.39

0

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5

Earnings Per Share


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Figure 12: Value Sensitivity to Changes in Revenues

% Change in estimated revenues

Fair Value

-15% -10% -5% 0% 5% 10% 15%

36.50 39.15 41.80 44.45 47.10 49.76 52.41

Source: Awraq Investments

Figure 13: Sensitivity of Weighted Valuation to Changes in Ke and WACC

Sensitivity Analysis

Change in Ke

10.50% 11.00% 11.50% 12.00% 12.50% 13.00%

Change in Weighted Valuation

Terminal Growth Rate (G)

2.50% 48.03 45.22 42.71 40.47 38.46 36.63

3.00% 50.36 47.23 44.45 42.01 39.81 37.84

3.50% 53.01 49.50 46.44 43.73 41.32 39.17*Source: Awraq Investments

The outlook for potash prices and demand in the coming years are uncertain, although thecurrent situation of the industry is promising, the expected increase in supply once theexpansion projects for factories internationally might oversupply the industry. Current stockrecommendation is HOLD based on our estimated fair value for the stock price which is JD44.45, which is 7% higher than the stock price on November 29, 2011 that closed at JD 41.5.

Peer MultiplesFor peer analysis we have considered the following potash producers: Potash Corp (POT),The Mosaic Company (MOS), Israel Chemicals (ICL), Agrium (AGU), and K+S. The

average P/E multiple for peer companies was 11.43 times on November 20, 2011, which isvery close to the estimated P/E for APOT which is 12.76. As for the Price to Book, theaverage P/BV for the considered peers is 3.28 which is also slightly lower than the estimatedP/BV for APOT which is 3.86. On November 20, 2011 APOT had the highest P/E multipleat 13.03 times which is very similar to Potash Corps P/E of 12.93. While APOTs P/BV wascame in third place at 3.66 times compared to Potash Corps P/BV of 4.96 times and IsraelChemicals P/BV of 4.56 times.


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Potash Industry OverviewThe potash industry is a consolidated industry where 80% of the global supply is dominatedby eight companies. Most of the potash supply is coming from Canada, Russia and Belarus.The barriers to entry to the industry are high which is preventing new companies from

entering the industry.

The potash industry witnessed a strong downturn in year 2009 although the selling pricesstayed around $495 average but sales dropped due to the drop in the price of crops and thelow application rates for fertilizers which affected the demand of potash around the world, butthe industry has well recovered during year 2010 and the first half of year 2011 although itstill has not returned to its record high that was set in year 2008.

The drop in the application of fertilizers during years 2008 and 2009 was the main reason forthe low demand for potash during those years, however in year 2010 the global economiesstarted to recover which positively affected the agricultural sector and there was a surge in thedemand for fertilizers, which consequently caused an increase in global demand for potash.

About Potash

Potash is one of the three primary plant nutrients (the other two being fixed nitrogen andsoluble phosphorus). While the most used nutrient Nitrogen is produced using industrialprocesses, both potash and phosphate are mined products. There are no real substitutes forpotash, where the closest substitute is animal manure and other low-potassium-contentsubstitutes, which are not as effective as potash and can only be profitable if transported inshort distances to crop fields.

Potash Demand

The main demand drivers for potash are population growth, decrease in arable lands, meat

consumption, demand for bio-fuels, and increase in demand for commercial crops such ascorn, rice and soybeans.

Potash shipments in year 2010 were a little over 50 million tons while consumption was over51 million tons. The demand is expected to increase to reach 57.5 to 60 million tons in year2011 and eventually reach 65-70 MMT by year 2015.

Figure 14: Potash Demand compared to Operational Capability

Source: Potash Corp

0

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70

Million Tonnes KCI

Demand Total Operational Capability


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Also it should be noted that the US policy regarding the bio-fuel is an important driver formarginal demand for potash. If fuel prices maintain their uptrend, the urge for bio-fuelproduction could actually push the prices of grains higher. In year 2010 about 28.7% of allUS grain crops were used for bio-fuel, which is about 120 million tons of 400 million tons

that were planted during that year. The US is mainly focusing on Corn bio-fuel while Brazilis focusing on sugarcane bio-fuel. However, due to the currently limited usage of bio- fuel itis expected that the effect on potash demand will be more evident in the long run.

The following figures illustrate the consumption for Grains, Oilseeds, Fruits and Vegetables.As it can be noted from the figures below the world crop consumption is growing steadilydue to the constant population growth, which is mostly effecting the demand for fruits andvegetables which constitutes 22% of potash fertilizer uses.

Figure 15: World Crop Consumption Figure 16: Agriculture Commodity Prices

Source: USDA, FAO, Potash Corp

Potash Supply

As a response to the expected increase in demand, potash producers have either initiated orplanning to initiate projects for expansion of their factories, which according to theinternational fertilizers association (IFA) might lead to oversupply in either year 2014 or2015 if all expansion projects are completed according to their current scheduled time line.About 30 potash-related expansion projects are planned which will add around 34% to thecurrent supply, making the capacity for 2014 to be around 74 MMT, which could be growingin faster rate than the demand

Figure 17: Potash Expected Supply and Shipments

Source: Public filings, Potash Corp

0

2

4

6

8

10

12

1970 1980 1990 2000 2010 2020F

Billion Tonnes

Grains Oilseeds Fruits & Vegetables

0

10

20

30

40

50

60

70

80Million Tonnes KCIHistorical

Operational

Capability

Expected

Operational

Capability

Historical

Shipments

Expected

Shipments

Source: World Bank

0 50 100 150 200

Wheat

Rice

Soybean

Corn

Palm Oil

Coffee

Sugar

Cotton


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Potash uses

Potash helps plants develop strong root systems and retain water, contributing to higheryields and greater resistance to drought, disease and insects. It also improves the taste andnutritional value of food, and, in animals, helps growth, maintenance and milk production. In

the US, more than 45 percent of potash is applied to corn. In China, fruits and vegetablesconsume half of the potash applied, with rice taking a further 28 percent. In Brazil, almost 75percent of the potash is used to produce soybean, sugar cane and corn. In Malaysia andIndonesia, oil palm accounts for more than 70 percent of potash consumed. The fact that thepotash is applied on a diversified range of corps makes it less vulnerable to low applicationrates on one type. As the following figure shows, 22% of the potash application is for fruitsand vegetables, while 14% is for corn and 13% for Rice.

Figure 18: Potash Prices versus other Fertilizers

Type Percentage

Corn 14%

Rice 13%

Wheat 6%

Soybeans 8%

Sugar Crops 9%

Palm Oil 5%

Fruits and Vegetables 22%

All other crops 23%Source: MAG Industries

Other non-fertilizer uses of potash include water treatment, soap making, textiles and several

other processes. Although potash is used mainly as a fertilizer other non-fertilizer uses hasbeen increasing, for an example 15% of the potash consumption in the US is for non fertilizeruses. While the global consumption of potash for non fertilizers uses is around 5%.

Potash Prices versus other Fertilizers

Although Potash is currently the third most used fertilizer, the demand for it is expected toincrease by a higher percentage than other fertilizers, the following figure illustrates theestimated growth rates for the three primary fertilizers.

Figure 19: World Fertilizer Consumption Growth (2011FPercent)

Source: IFA

Currently China makes potash purchases through a global contracting process with the mainglobal suppliers. Historically, this has been an annual - and then semi-annual - process. Prices

0 1 2 3 4 5 6 7 8 9

Nitrogen

Phosphate

Potash

14%

13%

6%

8%

9%5%

22%

23%

Corn

Rice

Wheat

Soybeans

Sugar Crops

Palm Oil

Fruits and Vegetables

All other crops


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to Chinese buyers now sit at US470 per ton. But it is expected that this price will movesignificantly higher in 2012. The reasons are: one, the most recent price to India of US530ton likely presages a similar move for shipments to China; two, global pricing momentum hasthe potential to hike what China and India are paying to $US600 ton next year and beyond.

The first quarter of 2012 potash deliveries are expected to be priced around $530 MMT, the2012 market is expected to be tight due to the incompletion of expansion projects andlimitations on productions, while in year 2015 the supply will have greatly increased whilethe demand might have decreased or not increased as the supply, china is expected to be %75potash independent in year 2015.

Fertilizers prices have not achieved the peak prices of year 2008, but the prices of fertilizersare picking up in year 2011 (except for Urea which remained stable around 2009 levels),what also can be noted from the graphs is that potash tends to have different trends that otherfertilizers.

Figure 20: Potash Prices versus other Fertilizers

Source: Bloomberg

The prices of potash were higher than other fertilizers only during year 2009, after that theprices of other fertilizers regained and returned to be higher than potash prices (again, except

of Urea which remained stable and lower than potash prices).

Figure 21: Fertilizer Prices/ Potash Price

Source: Bloomberg

0

200

400

600

800

1000

1200Middle East Muriate Of Potash (MOP) - FOB

Africa Trisodium Phosphate - FOB

Arabian Gulf Urea - FOB

Arabian Gulf Ammonia - FOB

0.00

1.00

2.00

3.00

4.00

5.00

6.00Africa Trisodium Phosphate - FOB / Middle East

Muriate Of Potash (MOP) - FOB

Arabian Gulf Urea - FOB / Middle East Muriate

Of Potash (MOP) - FOB


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Ratio of Fertilizer Prices to Potassium Chloride Prices

The following figure provides a comparison of fertilizer prices compared to PotassiumChloride. Potassium chloride was lower than other fertilizers since 1995, except for Nitrogen.Ammonium nitrate and sulfate of ammonium were lower than potassium chloride in 2008.

While in year 2011 only phosphate and Anhydrous ammonia are price higher than PotassiumChloride.

Figure 22: Average U.S. Farm Prices of selected fertilizers Divided by Price of Potassium Chloride

Year MonthAnhydrous

ammonia

Nitrogen

solutions

(30%)

Urea

44-46%

nitrogen

Ammonium

nitrate

Sulfate of

ammonium

Super-phosphate 44-

46% phosphate

Diammonium

phosphate (18-

46-0)

Potassium

chloride 60%

potassium

1995 Apr. 2.13 1.09 1.72 1.44 1.17 1.51 1.70 1.00

1996 Apr. 1.98 1.19 1.82 1.52 1.20 1.69 1.92 1.00

1997 Apr. 1.99 1.05 1.69 1.49 1.22 1.69 1.79 1.00

1998 Apr. 1.55 0.82 1.20 1.18 1.15 1.55 1.62 1.00

1999 Apr. 1.26 0.76 1.05 1.08 1.02 1.52 1.57 1.00

2000 Apr. 1.38 0.79 1.21 1.18 1.01 1.41 1.45 1.00

2001 Apr. 2.35 1.11 1.65 1.53 1.13 1.39 1.44 1.00

2002 Apr. 1.52 0.77 1.16 1.19 1.14 1.35 1.38 1.00

2003 Apr. 2.26 0.98 1.58 1.47 1.18 1.47 1.52 1.00

2004 Apr. 2.09 0.98 1.52 1.45 1.13 1.47 1.52 1.00

2005 Apr. 1.70 0.88 1.36 1.19 1.00 1.22 1.24 1.00

2006 Apr. 1.91 0.85 1.33 1.34 0.97 1.19 1.23 1.00

2007 Apr. 1.87 0.99 1.62 1.36 1.03 1.49 1.58 1.00

2008 Apr. 1.35 0.71 0.98 0.91 0.70 1.43 1.52 1.00

2009 Mar. 0.80 0.38 0.57 0.51 0.44 0.75 0.75 1.00

2010 Mar. 0.98 0.55 0.88 0.78 0.64 0.99 0.99 1.00

2011 Mar. 1.25 0.58 0.88 0.8 0.7 1.05 1.17 1

Source: USDA


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DisclaimerAwraq Investments and its affiliates obtain information from sources they believe to bereliable, but do not warrant its accuracy or fitness for a particular purpose, and disclaim forthemselves and their information providers all liability arising from the use.

The Information in this publication is provided in good faith for informational purposes only.The information provided is not offered as tax, legal, or investment advice, or an offer to buyor sell securities or otherwise. The information provided in this publication may be displayedand printed for your personal, non-commercial use only. You may not reproduce, re-transmit,distribute, disseminate, sell, publish, broadcast, or circulate the information in any form ormedia to anyone, without the expressed written consent of Awraq Investments.

Awraq Investments is not liable for any loss resulting from any action taken or reliance madeby any person on any information or material posted by it. You should make your owninquiries and seek independent advice from relevant industry professionals before acting orrelying on any information or material made available to you in this publication. You rely onthis information at your own risk.

Awraq Investments, its subsidiaries, parent, and/or any connected parties, may act or tradeand/or enter into any transaction that maybe inconsistent or disregard any informationcontained herein.

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