Israel Chemicals Seeks to Regain Initiative After Tough Year

With shares down two-thirds since January, CEO Stefan Borgas unveils strategic plan.

It hasn’t been an easy ride for Israel Chemicals this year, but this week CEO Stefan Borgas looked as if he were trying to capture the initiative, unveiling a wide-ranging plan to redirect his company over the next few years.

Perhaps the biggest blow to ICL in 2013 was last week's threat by Russian potash producer Uralkali to bolt from one of the world’s two big potash cartels and undercut current prices for the agricultural nutrient by 25%. Potash is ICL’s flagship product, and Uralkali’s move could shrink ICL’s gross revenues by some $500 million a year.

Another factor that has been weighing heavy on the company is the government’s Sheshinski II Committee, which is examining whether the government should revise its policy on royalties paid by companies for the right to exploit national resources, namely ICL and its rights to Dead Sea minerals. Meanwhile the company is fighting environmentalists for the rights to mine phosphate at Sde Brir near Arad. Earlier in the year, the government turned down a bid by Phosphate Corporation of Saskatchewan to buy a controlling stake in ICL.

ICL’s strategy, unveiled on Wednesday as it reported its second-quarter earnings, has operational and financial elements to it. On the opera tonal side, it calls for deep cost cutting and for refocusing operations, most notably a reduction in its dependence on crop nutrient potash. Thanks largely to the dominance of the world market by two big cartels, potash prices had been unusually high over the last decade. As a result, potash provided ICL with 63% of its operating profits in 2012.

The financial strategy is to enhance shareholder value by either paying out a big one-time dividend or buying back shares for $500 million. Another element - listing its shares overseas starting as early as 2014 - aims to unlock more value for shareholders on the assumption that its stock will trade at a higher valuation than it does today on the Tel Aviv Stock Exchange. Borgas, ICL’s first foreign CEO, is spearheading this plan to transform the company into a true multinational and create a platform for raising capital to help pay for mergers and acquisitions. The market’s initial appraisal of the move has been positive. Even though the company reported a drop in second-quarter profit on Wednesday, its shares have risen nearly 3% in the past two days to close at NIS 28.40 on Thursday. That still puts them about a third less than they were at the start of the year.

After years of enjoying the numbing effect of easy profits derived from potash sales, ICL will likely look to cut expenses by some $300 million to $400 million annually by 2016 to offset the combined impact of declining revenues after taxes and a likely increase in royalty payments. Much of the savings will come from paring down its $4 billion a year procurement budget by 3% to 4%.

Other measures include lowering its production cost structure for minerals, likely through improving profitability at the company's potash mine in Britain, expanding potash production in Spain and finding an alternate site for the costly phosphate mining operations at Mishor Rotem.

New joint ventures

ICL will also attempt to expand its potash producing capacity at the Dead Sea and elsewhere in the world. The company is believed to have explored the prospect of mining operations in Ethiopia.

There is a good chance that ICL will enter an international phosphate mining partnership, whether or not it receives permission to open a new phosphate mine at the controversial Barir field near Arad, in order to provide alternative phosphate sources upon depletion of reserves at its current mines within 10 years. In recent weeks Israel Chemicals completed two due diligence examinations on alternative sites and is currently conducting tests on two other sites, with a final decision expected by the end of the year.

Another direction the company is exploring is to reduce its dependence on potash by expanding its operations in the food sector as a supplier of phosphate salts to the meat, baked goods and dairy industries. ICL is eyeing emerging markets such as China with higher value-added operations geared towards such industries.

The strategic plan's financial goals include gradually reducing capital spending that doesn't yield growth, such as the dikes it’s constructing to protect Dead Sea hotels from becoming inundated by the rising level of ICL’s evaporation ponds, and focusing on growth-enhancing investments such as strategic acquisitions.

In a conference call with analysts on Wednesday, Borgas said that if local regulation continues to impose difficulties on the company, it won't hesitate to delist its shares from the TASE. That would be a serious blow to the exchange, which is strugging to increase trading, as ICL is the most active stock currently trading on the exchange.

Sivan Faraj