Israel Chemicals sued for $291m in gov't royalties

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The government claims that Dead Sea Works has been underpaying royalties since August 2000.

The government has sued Israel Chemicals Ltd. (TASE: ICL) unit Dead Sea Works for $291 million. The government is demanding $265 million in unpaid royalties for 2000-09, and $26 million from a higher royalties rate on potash sales in excess of three million tons a year beginning in 2010. It also wants to amend the royalties calculation on metallic magnesium sales.

The government claims that Dead Sea Works has underpaid royalties since August 2000 from what was required under the company's 1961 franchise. The franchise, legislated as the Dead Sea Works Franchise Law (5721-1961), was later extended to 2030. The claim is part of the arbitration hearing with the company. The final amount of the claim could change on the basis of material filed during the hearing.

The government is also seeking to reopen royalties owed by Dead Sea Works on potash sales in excess of three millions tons a year. The government wants to double the royalties to 10% of sales from the current 5%, retroactive to 2010. The government has asked the arbitrators to order Dead Sea Works to hand over all material related to the royalties, which it has failed to provide to date, in breach of the explicit provisions of the franchise agreement.

In a notice to the TASE yesterday, Israel Chemicals said that Dead Sea Works has a legal opinion which asserts that it has paid the royalties stipulated by the franchise's provisions. The calculation for the royalties has been consistently applied from the time that Dead Sea Works was a government company, and that the method was known to and accepted by the government.

Israel Chemicals added that, on the basis of this legal opinion, it has made provision for the amount of the claim in its financial report.

The government founded Dead Sea Works in 1952. The company produces potash, bromine, bromide products, and magnesium to subsidiary Dead Sea Magnesium for the production of magnesium-based products. The 1961 law gave the company the exclusive franchise to mine the Dead Sea from a 600-square kilometer section in the southern basin between Masada and Sdom.

Israel Chemicals was founded as a government company in 1968, incorporating Dead Sea Works and other chemicals companies. The government sold the controlling interest in Israel Chemicals to Israel Corporation (TASE: ILCO) in 1999.