Israel Chemicals Besieged at Home as CEO Looks Abroad

When Israel Chemicals Ltd.’s Stefan Borgas addressed a conference in Beer Sheva this week, the German-born chief executive officer was assailed with shouts of “Go home” from dozens of his workers.

The clamor from employees of the Rotem phosphate mine, where jobs have been eliminated as ICL cuts costs, is “a sign of people alive and fighting for their company,” Borgas said in response.

While the CEO doesn’t plan to leave Israel, ICL does face a retreat. Its failure to gain permission for a new mining project in the Negev Desert may mean that, with declining reserves at Rotem, the company has to close its phosphate business in the country and lose more than 1,000 workers.

The Israeli Health Ministry today recommended blocking ICL’s proposed Sde Barir mine on concern the project may lead to radioactive pollution and damage the health of residents of the nearby town of Arad. If the ruling is implemented by the government, it may be the final nail in the coffin for the phosphate-mining division, according to the CEO, 49.

“If this is the opinion of the ministry, then we have to prepare the exit of this business in Israel,” Borgas said in an interview at ICL’s Tel Aviv headquarters. “Our executive committee has already asked the management team to develop the exit plan.”

The company has said any government decision to block the project, as well as the threat of tax increases in Israel, would spur a search for investment alternatives abroad.

Overseas Investments

Regulatory uncertainty may lead ICL to divert potential investments of $1 billion to other countries, resulting in a “long-term shrinking” of its operations in its home nation, Borgas said.

ICL has fallen 34 percent on the Tel Aviv Stock Exchange’s TA-25 index in the past 12 months, the biggest decline among companies on the gauge. It’s among fertilizer producers hurt by last year’s potash-industry collapse, when Russia’s OAO Uralkali abandoned a marketing venture that controlled 40 percent of global exports of the soil nutrient.

The breakup sparked a price war that contributed to a 37 percent decline in 2013 profit to $819 million, Israel Chemicals said last month. Now a risk of higher royalty payments to government coffers may worsen the company’s problems.

“We are telling our investors there is a maximum exposure of around $50 million to $60 million per year,” Borgas said of the potential tax increases. A government-appointed committee began reviewing natural-resources policies last year. Any move to increase royalty payments would come just two years after a previous government raised them.

Rule Changes

Prime Minister Benjamin Netanyahu and Finance Minister Yair Lapid aren’t doing enough to encourage investment in Israel and regulatory uncertainty is damaging, according to Borgas.

“The most important thing for ICL is for the government to make a decision,” he said. “If you change your rules or laws every 18 months how can we plan? We are building plants that last 30 years not 30 weeks.”

Last April, Potash Corp. of Saskatchewan Inc. scrapped a proposed takeover of the company citing regulatory uncertainty.

Borgas has already started to expand investments abroad. In February, the company invested $23 million in Allana Potash Corp. to tap the Danakhil project in Ethiopia. It estimated then that the mine, which may take five years to develop, will yield 1 million metric tons annually, about a fifth of ICL’s global potash output in 2013.

Dual Listing

The company in November said it will dual-list its shares in the U.S. to attract more investors and raise funds for acquisitions. Parent company Israel Corp., controlled by billionaire Idan Ofer, is considering the sale of part of its 52.3 percent stake to increase trading volume.

“We need access to capital markets in order to grow,” Borgas said. “We need a lot of access to the international debt markets and in the long term we might have a few opportunities in which we need equity. The Israeli capital market alone is too small for our needs in the long term.”

While diversifying geographically, ICL also plans to expand in areas such as food additives and flame retardants in a bid to boost profit. At the same time, it’s cutting costs after potash prices fell.

“We will deliver a significant contribution already this year to the bottom line,” Borgas said.

ICL may report a 19 percent increase in profit in 2015 as costs drop and potash prices stabilize, according to the average estimate of analysts surveyed by Bloomberg. Ilanit Sherf, an analyst at Tel Aviv-based Psagot Securities Ltd. with a buy rating, expects at least $60 million in cost cuts by 2015.

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