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A note on Compass Minerals

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October 02, 2008 – Comments (1) | RELATED TICKERS: CMP , POT , MOS

Compass Minerals is declining precipitously today, as are other agricultural commodity stocks like Potash Corp and Mosaic.

Today, Mosaic reported some disappointing results, which sparked the selloff. Indeed, Mosaic is off over 30%.  Forbes reports that phosphate prices are falling, nitrogen prices are peaking and potash prices aren't rising as fast as expected.

The  thing is, Potash Corp's business is primarily potash. Compass Minerals' business is actually mainly highway deicing salt, with about 1/4 of their business being sulphate of potash. Mosaic gets a no moat rating at Morningstar, because the firm feels that nitrogen and phosphate aren't very moaty commodities. However, Potash Corp controls a huge portion of the world's free potash supply, and Compass controls a large source of SOP, which is a specialty fertilizer. Both firms get wide moats.

Fear of demand destruction is justifiable in the near term, as are fears that US farmers won't be able to get credit, but keep in mind that potash prices have soared. As reporteed on Yahoo, Mosaic sold muriate of potash at $488 a ton.  That's substantially higher than this quarter last year.

Additionally, there are a number of articles on Google News indicating a salt shortage in the US, and correspondingly elevated prices. That's excellent news for Compass' main business. And given how much the stock has been beaten down, Compass should offer an adequate margin of safety even if SOP prices fall back to their previous levels. I think, though, that the market is underestimating the long run demand for potash fertilizer.

1 Comments – Post Your Own

#1) On October 03, 2008 at 8:17 AM, weiwentg (99.01) wrote:

Also, during the recent conference call, Mosaic mentioned that global potash supplies were low. They got some orders from customers of Potash Corp that they were unable to fill. Presumably, Potash Corp couldn't fill the orders either. If global potash supplies are that low, we could see a scarcity premium.

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