Prisma Capital Markets - Equity research

July 31, 2008

-1- Israel Chemicals– Two good years…

Israel Chemicals extracts the natural resources of the Dead Sea and the Negev to yield avariety of fertilizers (potash and phosphate), bromine based products, and magnesiumbased products.

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We estimate that the demand from China and India, coupled with the limitedsupply of potash, will have the biggest impact on the short term prices of potash.In our opinion the price that will be determined by the new contracts with the twostates will be significantly higher than the price dictated by the current contracts.Given the limited supply and the possibility of depleted inventories in Chinapotash is indeed significantly less than the demand, and so we may see ascenario in which the price of potash reaches levels above $1,200 per ton.However, a necessary precondition of such an increase is the rise in the price ofgrain.

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Nevertheless, in the immediate short term the continued drop in commodityprices, particularly the price of grain, will have a negative effect on stocks in thesector. The weakening of commodity prices cannot be simultaneous with risingPotash prices indefinitely. One will need to give!

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Whilst we estimate that the near future will provide positive headlines for thepotash sector, the increase in supply (predicted for 2012 and beyond) presents acompletely different long term perspective. In our opinion

the increase in theglobal output will lead to a sharp decrease in the price

, while the entry ofnew participants into the club of potash producers will only accelerate theprocess. We remind you that in recent weeks the arrival of two companies(EuroChem, Rio Tinto) into the potash industry has been announced.

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In the eyes of the companies, money invested in mining projects becomes a sunkcost. Accordingly, as long as the marginal quantity is selling at a profit over thevariable costs, it makes sense to sell it – unrelated to the issue of whether or notthe profit constitutes a suitable return for the fixed cost. As mentioned, this factorcan intensify the pressure on prices.

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In our opinion,

the years 2008-2009

will be two of the best years for ICL

, as aresult of the ideal convergence of the high price of potash and ICL's ability to sellamounts beyond their production capacity (by tapping into their reserve). Ourestimation model predicts that in these years the company will sell close to900,000 tons over their production capacity, and these sales will yield $750M inincome.

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In our opinion,

the fact that ICL's current right to utilize the resources of theDead Sea expires in 2030 cannot be ignored

. Although we are dealing withquite a long time, the issue raises the basic question: do we capitalize andestimate the value of a company whose production activities are indefinite, or dowe perhaps regard the company as having a finite endpoint?

Using the DCF model to evaluate the company, we set a target price of $19.5 (68.00NIS) and a neutral recommendation.

Uri Waisbord, Head of Sell Side Research

Tel: +972-3-7567633

uri.waisbord@prismafinance.com

Israel Chemicals – The good years, and beyond

Israel Chemicals

Bloomberg:

ICL IT

Target PriceILS 68.00Current Price62.22High-low (12 months)31.02 – 81.10Market CapILS 85.283 mil.Daily turnover (20 d.av.)ILS 345.3 mil.RecommendationHOLD

Prisma Capital Markets - Equity research

July 31, 2008

-2- Israel Chemicals– Two good years…

We believe that the operations of Israel Chemicals are well known to our clients and, as aresult, we felt that we did not have to describe the areas of activity and the basic variablesimpacting on the company. Therefore, we will move on to a discussion regarding themajor data impacting the value of the Company.And we will start from the end….

Let's meet in 2030

We believe that the analysts who cover Israel Chemicals have been ignoring the issue ofthe concession under which the Company operates.Without overburdening the readers with history (which begins during the British Mandate),Israel Chemicals has been operating under a concession initially granted to it by the Stateof Israel in 1961, a concession that was scheduled to conclude in 1999. However, in 1986(when the Company was still government owned), the concession was extended until2030.According to the concession, the Company has the sole right to "

obtain by evaporation….or any other method….the minerals and the chemicals…in and under the Dead Sea and to prepare them for market…"

In order to realize the concession, theCompany received far-reaching rights regarding the construction of facilities and theestablishment of the infrastructure required to extract the minerals. In consideration of theconcession, the Company pays a "

royalty equal to 5% of the value of the potash chloride,bromine and the magnesium chloride…sold in any given year… [based on] its value in the plant, unpackaged. This value shall be calculated by taking its sales price…, during any given year and by deducting….fair packaging expenses…and shipping and insurance from the plants of the concessionaire… and 10% of the amount due him by deducting all of the aforementioned expenses…"

A similar formula was set out in connection with thedownstream products. The total of these royalties are insignificant in amount. In 2007,they amounted to $20 million (0.9% of the revenues of the fertilizer division) and in 2006,they amounted to $35 million (2.3% of the revenues of the fertilizer division in that year).The Concession Law stipulates that "

at the end of the concession period…the government shall receive possession of all of the fixed assets belonging to the concessionaire and the government shall pay the concessionaire, in consideration of the aforementioned fixed assets, their depreciated replacement value, as of the termination date."

The ConcessionLaw further defines that

"the term 'depreciated replacement value' in connection with fixed tangible assets means the purchase price of similar new assets at their market price on the termination date, less the depreciation in respect of the usage period of each of the assets. Such depreciation is based on the technical life span of such asset, taking into consideration the condition it was kept in by the concessionaire and the conditions in existence at the Dead Sea."

The Concession Law further stipulates that

"if after the expiration of the concession, the government desires to offer a new concession to extract the mineral salts…to anyone who is not the concessionaire, the government shall first offer the new concession to the concessionaire at terms that are not less convenient than those it would have offered the other person."

Prisma Capital Markets - Equity research

July 31, 2008

-3- Israel Chemicals– Two good years…

The major upshot of the above, for our purposes, is as follows:

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The total royalties currently being paid by Israel Chemicals are insignificant in amount.

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At the end of the concession period (2030), and in accordance with the terms of theconcession, the government is supposed to receive possession of all of the fixedassets related to the production of potash and to the utilization of the resources of theDead Sea (and which are located in the concession area in the Dead Sea).

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In consideration of the assets, the government will pay Israel Chemicals thedepreciated value of the assets.

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Israel Chemicals has the right of first refusal on receiving the new concession.However, receipt of this right shall be done under identical conditions to be offered to,or conditions to be offered by, a third party. It is likely that the renewed rights will havepoorer terms compared to the current terms (with the new terms possibly taking theform of a large one time payment for the concession or enhanced royalty payments tothe government, or a combination of these two possibilities).

What significance could there be to an event that is expected to occur in 22 years?

It appears that such an event is quite significant.The major question is whether the permanent cash flow should be discounted to infinity, orperhaps should the cash flows the company expects to generate from its operations inIsrael be cut off in 2030 (adding an additional compensation, pursuant to the ConcessionLaw)?It is important to emphasize that there is no difference as to the method chosen to valuatethe company. Whether we base ourselves on the operating income multiplier method oron the DCF method, or on the EV/Ebitda method, it is clear that in each of these methodsit will be necessary to take into consideration the following fundamental question:

are wediscounting and valuating the value of a company the horizon of whose operationsis infinite, or are we dealing with a company in which there is significant uncertaintyover its continued operation in another 22 years under present conditions?

We would like to emphasize that the possibility that Israel Chemicals will continueoperating in the present areas of the concession after the end of the concession inanother 22 years most definitely cannot be overlooked. However,

will it do so under thepresent conditions?

Let each of the readers ask themselves the following question: if they were the FinanceMinister, would they be satisfied with the negligible royalties currently being paid by IsraelChemicals, or would they try to renegotiate for the concession a high one-time payment orhigher royalties into the public coffers?While it is true that Israel Chemicals has the right of first refusal and it can elect torepurchase the concession under its new terms, it is reasonable to assume that suchterms will be significantly inferior to the terms of the current concession.