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
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Tel: +972-3-7567633
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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
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