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Some thoughts on Compass Minerals

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January 05, 2009 – Comments (0) | RELATED TICKERS: CMP

Compass Minerals is a producer of salt and potash of sulphate. The former is used to de-ice roads in the Midwestern United States. The latter is used in specialty crops, some of which are sensitive to regular potash. Compass derives about 3/4 of revenues from salt.

The stock bounced around wildly last year, hitting a high in the low $80s and a low around $35. The stock is around $62 now.

As a long term investor, I believe that demand for salt will remain consistent. Compass is a very low cost producer. Competing salt mines are considerably smaller than Compass' main mine at Goderich. Goderich is right on Lake Huron and has a port right next door, so their transport costs are also low. Lastly, Rohm and Haas is probably their only other real competition. Pricing tends to be rational in oligopolies. 

As to fertilizer prices, farmers seem to be postponing purchases. This isn't something you can put off forever.  

In the short term, Compass' stock price will fluctuate based on investor sentiment about winter weather and fertilizer prices. If farmers have indeed been postponing fertilizer purchases and they then make large orders this fall, Compass and a lot of the other fertilizer producers will see a jump in orders. This year's weather looks quite wintry, so I'm not particularly worried about their salt sales; I got into the stock during a period of mild winters. If Compass faces a number of consecutive mild winters, their financial footing could slip.

After selling some near the peak (purely luck) and buying some in the $40s, my cost basis is about $45. I'd look to trim my position above $70. I would like to hold the stock long term, though.

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