The Shekel Drops / ICL Makes Billions on Phosphate Mining, Pays Royalties of 0.3%

Cabinet members wrangling over whether to approve the agreement reached with the state over ICL's exploitation of potash reserves at the Dead Sea.

The state's conduct regarding the royalties it collects from Israel Chemicals' exploitation of natural resources is dumbfounding. While arguing bitterly with the company over the royalties it should pay on potash mining, it isn'tso much as peeping about the miniscule take it gets from exploitation of another natural resource: phosphate rock.

The members of cabinet are wrangling over whether to approve the agreement reached with the state over ICL's exploitation of potash reserves at the Dead Sea. The compromise has ICL paying royalties equivalent to 10% of its revenues from potash mining. But it turns out that the royalties the company pays on another natural resource, phosphates, is just 0.3%.

ICL phosphate works - Eyal Toueg - 04012012
Eyal Toueg

Phosphates are sold as a soil nutrient - a fertilizer. ICL mines them in the Negev. The company is also expected to obtain a permit shortly to mine the presumably large Barir field near Arad, whose potential the Israeli government discovered in the 1980s.

In 2010, ICL's phosphate business generated $109 million in operating income on $1.06 billion in sales. But it paid only about $3.3 million in royalties - just 3% of profits and 0.3% of revenues.

According to the Mining Ordinance, ICL should be paying royalties of 2% of revenues to the state.

The Mining Ordinance was enacted in 1925 by the British Mandate authorities when the likelihood of finding phosphates in the country was considered remote. Over the next 87 years the phosphate mining industry changed radically, particularly during the past three years.

For about 35 years global phosphate prices remained stable at around $50 per ton. In 2008 this picture shifted as raw material markets swelled worldwide and phosphate prices skyrocketed to an all-time high of $345 per ton. Following the economic crisis the price dropped to about $100 per ton but has since recovered, rising to around $190 - almost fourfold its historical average.

As phosphate prices were unusually volatile, the state began reexamining royalties. Mediation between the government and ICL on the method to calculate royalties, but not the rate itself, concluded in 2009. The mediator, former antitrust commissioner Dror Strum, ruled that ICL owed the government an additional $11 million for the years 2000 to 2009. The royalties were determined at a certain amount per ton, soaring from 2.5 cents to 26 cents per ton. In 2010 the rate was again updated, according to Strum's formula, and was set at 44 cents per ton.

The government ostensibly won in mediation, with royalties rising 18-fold within three years. But ICL is paying 44 cents a ton while the market price is $190 per ton - an absurd rate of just 0.3% of sales, reflected also in ICL's huge profit margins.

This rate is far below the bar set for ICL on potash royalties and the level set by the Mining Ordinance too. ICL's profitability from phosphates has only improved following the surge in market prices. In the first nine months of 2011 phosphate sales reached $1.34 billion, with profits at $192 million, while ICL paid $2.24 million in royalties for the first six months of the year.

Ministry promises to conduct survey

The reason for the low royalties is that the mediation was based on that British Mandate law still in effect setting royalties at 2%. Although Strum said the law's reasoning should be examined, the government did nothing.

When the Sheshinski Committee began examining the government's cut from profits of natural gas companies, changing the antiquated Israel Petroleum Law from 1952 in the process, the government again didn't bother revisiting its stance on the Mandate-era Mining Ordinance and the appropriate level of phosphate royalties.

And now, with a historic compromise reached with ICL on potash royalties, the government again didn't bother extending the agreement to cover phosphates.

The Energy and Water Ministry responded that royalties are levied on each mined ton (over 6 million tons a year of unrefined phosphate ), not for each ton of the refined product; there's a great difference between the amount mined and the final product. The royalty formula is complex and based on the price of unrefined phosphate less recognized production costs, the ministry said.

"The ministry intends to conduct a comprehensive survey on royalties from natural resources in various countries around the world," it added. "The survey's findings will be processed and examined in order to update, as far as necessary, the levying of royalties in Israel."

ICL, for its part, said that "figures in the financial statements are irrelevant in calculating royalties, as they include activities of foreign companies and sales of complex downstream products." ICL, however, refused to convey the relevant figures - sales, profits and royalties from phosphate mining.