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Excellence downgrades Israel Chemicals

 Analyst Gilad Alper: We will see Israel Chemicals’ share enter a long period of uncertainty.

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LogoNewSmall/ By Efrat Peretz /

The new committee established by Minister of Finance Yair Lapid to review the state’s royalties from natural resources, beginning with the resources mined by Israel Chemicals Ltd. (TASE: ICL), will recommend sharply raising the royalties and taxes that the company pays, says Excellence Investments analyst Gilad Alper. Today, he downgraded his recommendation for the stock to “Market perform”, and cut his target price for the share from NIS 54 to NIS 43, which compares with an opening price today of NIS 42.40.

“We’re cutting our recommendation because of concern that the government will sharply raise taxes and royalties on the company, ” says Alper in the review.

18 months ago, the government raised the royalties on Israel Chemicals’ potash operations from 5% to 10% on sales in excess of 1.5 million tons a year. But the public criticism against Israel Chemicals has continued because of the low royalties. “The government is now planning to take the next step, ” says Alper. “It is possible that the tax model imposed on the gas companies will be replicated, with the necessary changes and adjustments, on Israel Chemicals.”

How much might Israel Chemicals pay in taxes? Alper made a comparison with Canada’s Mosaic Company (NYSE: MOS), excluding the dividend tax. He assumes a 25% companies tax rate (the rate that Israel Chemicals will pay from 2018), and concluded that the government’s take from Israel Chemicals’ operating profit will be 34% compared with the Canadian government’s take of 40% of Mosaic’s operating profit. To equalize the two, Israel Chemicals would have to pay an additional $140 million a year, which would cut its company value by NIS 4 billion.

There is a worse option for Israel Chemicals: if the government does not use another global potash company as a basis for comparison, but uses Australia’s natural resources tax, which would become the basic model for the new committee. “Either way, we will see Israel Chemicals’ share enter a long period of fundamental uncertainty with regard to its profitability, ” says Alper.


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