For Israel Chemicals Ltd. (ICL) a revival in potash prices can’t come soon enough. Too bad the government is slapping a windfall tax on its raw materials just as the market for the fertilizer begins to rebound.
Shares of ICL have plunged 23 percent in the past 12 months, the worst performer among 25 stocks in Israel’s benchmark index, as potash prices fell and the government reviewed its royalties policy. An Israeli government panel on May 18 recommended a 42 percent levy on all quarried materials.
The threat of a tax that the government says would add 500 million shekels ($144.5 million) a year to state coffers raises the prospect of further declines for ICL, which accounts for more than 7 percent of the benchmark index. The Tel-Aviv-based company said the levy may lead to job cuts from its 5,000-strong workforce in Israel and that it would freeze a $1 billion investment program until the measures are clarified.
“Once the potash market recovers and the price of potash increases, a big chunk of that upside will now end up in the pocket of the state rather than that of investors,” Gilad Alper, senior analyst at Excellence Nessuah Brokerage Ltd., who has a hold recommendation on the stock, said by phone from Petach Tikva, Israel, on May 25. “That will make the company the outcast of the potash industry.”
ICL trades at 14-times forward earnings, a 36 percent discount to Potash Corp of Saskatchewan (POT:US), the largest North American producer. The Israeli company yesterday said it would set aside $135 million to account for more government royalties.
“If the recommendations pass unchanged they will definitely affect the company’s competitiveness and profitability in the longer term,” Andrew Benson, a London-based analyst at Citigroup Inc. said in a phone interview on May 21. “That would affect its attractiveness to investors and future dividend payments.”
ICL has a dividend yield of 3.9 percent, compared with 3.8 percent at Potash Corp., and an industry median of 3 percent, data compiled by Bloomberg show. The chemicals company didn’t respond to a request for comment yesterday.
The company said in November it will seek a dual-listing of its shares in the U.S. to attract more investors, and to guard against what it described in January as “the possible further deterioration of Israel’s business environment.” Israel’s last government increased royalties two years ago, and the proposed windfall tax may be introduced in 2017.
The final version of the recommendations, which will be presented to parliament after a public consultation, “could be dramatically different from currently discussed measures,” Yulia Chekunaeva, a Moscow-based analyst at Goldman Sachs Group Inc., said in a note May 19.
Longer term, the levy might limit ICL’s “growth and returns in Israel,” according to Chekunaeva, who has a 29.70 shekels price estimate and a neutral recommendation on the stock. Benson recommends clients buy ICL as rising potash prices would support a short-term increase in the stock.
Potash prices are poised to climb as inventories decline and demand rises, JPMorgan Chase & Co. said in a May 9 note. It expects average prices as high as 290 euros ($395) per metric ton within the next two years, compared with a 257-euro consensus.
A mining company needs regulatory clarity to invest, as its activities are 20- to 40-year projects, Benson said.
“From a strategic perspective, if Israel chops and changes and seeks to alter agreements every two years, business planning becomes impossible,” he said. “A change in the tax system would be highly damaging.”
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