Potash Producer ICL Weighing on Benchmark: Israel Markets

Israel Chemicals Ltd. (ICL), the fourth-largest potash producer in the world by sales, is weighing on the Tel Aviv benchmark stock index on concern the government will exact higher royalties amid a global oversupply.

ICL, as the Israeli crop maker is known, has tumbled 36 percent this year, while parent company Israel Corp. has slumped 29 percent. The stocks were set for the steepest annual plunges since 2008 and 2011, respectively. That compares with an 8.8 percent jump for the TA-25 index. With the two companies making up an average 10 percent of the index's weighting, their declines trimmed the advance of the equity gauge by 4.4 percentage points, according to data compiled by Bloomberg.

Finance Minister Yair Lapid said in April that natural resources are a public asset and set up a panel to review royalties paid by ICL, a year after the government doubled the producer's taxes to 10 percent. The Tel Aviv-based company will probably report the smallest profit in four years, according to the mean estimate of 13 analysts surveyed by Bloomberg.

"Everything that is going on with ICL with regards to raising royalties is diminishing confidence investors have in Israel," Gilad Alper, a senior analyst at Excellence Nessuah Brokerage Ltd. in Ramat Gan, said by phone on Oct. 28. "The index could have done a lot better if we didn't have the issue with ICL."

ICL derived 29 percent of revenue from potash fertilizers last year, according to data compiled by Bloomberg. The company said on Aug. 8 that it's considering boosting its potash production at existing mines, while also planning to list shares outside of Israel.

Potash Revenue

The government panel will probably submit recommendations on royalties only by mid-2014, Alper, who has a hold rating on the stock, said.

The Israeli producer's potash revenue fell last year to $1.96 billion from $2.28 in 2011, lagging behind sales of OAO Uralkali, Mosaic Co. and Potash Corp. of Saskatchewan Inc., according to data compiled by Bloomberg. Earnings per share will probably slump 19 percent this year, to 83 cents, the data show.

Uralkali's move to withdraw from an export sales venture with Belaruskali on July 30 sank shares of potash producers worldwide on concern profits will crumble because of lower prices and surplus supply. Uralkali estimated the price of the fertilizer may decline below $300 per ton from about $400 currently.

Potash on Oct. 24 posted lower-than-expected third-quarter revenue and cut its full-year earnings forecast. Chief Executive Officer Bill Doyle called Uralkali's decision self-destructive as the price of the commodity has slumped.

Takeover Scrapped

"When it comes to the fundamental situation in the potash market it is hard to see how things will significantly improve anytime soon for ICL," Alper said.

Shares of ICL also fell after a deal with Potash Corp. fell through. Finance Minister Lapid has said he will oppose the Canadian company's bid and ICL employees protested against the plans. Potash scrapped plans to buy ICL in April.

"There must be receptivity to foreign investment and certainty in the rules that govern such investment," Potash said in a PRNewswire statement on April 25.

The company said on Aug. 7 that it's considering boosting production of potash and dual-listing their shares overseas. Shares have rebounded 14 percent since falling to a four-year low on Sept. 8.

ICL's impact on the index is over, said Guil Bashan, an analyst at Israel Brokerage & Investment Ltd. in Tel Aviv. "I'm not so sure about recovery, but there isn't much more downside at this level."

Higher Taxes

The potash sector isn't the only industry where the government raised taxes. The Israeli parliament passed a law to raise taxes on profits from domestic energy resources in March 2011. The nation collects as much as 62 percent of energy profits from 30 percent previously.

Foreign investors may be discouraged by the government's steps to boost royalty taxes, ICL said in an e-mailed statement.

Shares gained 5.3 percent in the first quarter, before sinking 40 percent through yesterday. Israel Corp. rallied 13 percent in the first three months of the year and has lost 37 percent since then.

"The stock has been hit by several reasons," Joel Jackson, an analyst at BMO Financial Group, said by phone from Toronto yesterday. "It could be just a small increase for royalties or it could be in taxes or it could be meaningful. It would be hard to say but that is what's keeping a lot of investors on the sidelines."