Financial Markets - Investor Desk

Business Strategy & Outlook

Compass Minerals holds an enviable portfolio of cost-advantaged assets. Its Goderich rock salt mine in Ontario benefits from unique geology, and with access to a deep-water port, it can deliver deicing salt to customers at a lower cost than competitors. Additionally, the company controls one of only three naturally occurring brine sources that produces the specialty fertilizer sulfate of potash, or SOP. These operations at the Great Salt Lake in Utah can produce SOP at a lower cost than marginal cost producers who convert standard potash. The majority of Compass’ salt sales are to highway deicing customers. Sales volumes are determined during the winter months and are strongly linked to the number of snow days per season. As such, weather has a big impact on Compass’ year-to-year results. The deicing salt business also exposes Compass to climate change risk. One effect of climate change is increased snowfall volatility from year to year, which affects Compass’ annual results. However, winter weather has shown mean reversion tendencies over longer periods of time.

Pricing for deicing salt is also linked to winter weather. However, prices have historically been relatively stable compared with other commodities. Deicing salt has a low value/weight ratio, creating regional markets, and transportation costs make up a significant portion of total costs to the customer. With mines close to waterways like the Great Lakes and the Mississippi River, Compass has a transportation cost advantage over its competitors. Compass also produces SOP, which is used for high-value crops that are sensitive to the chloride in standard potash (muriate of potash). While marginal producers use MOP and sulfuric acid to produce SOP, Compass makes most of its SOP directly from salt brines at a lower cost. Compass also plans to produce magnesium chloride, used for fire retardants to combat wildfires, and lithium as byproducts from the brine after extracting SOP. Compass will enter the fire-retardant market in the Western U.S. through its 45% equity investment in Fortress. Lithium demand will grow over 6 times during this decade due to higher electric vehicle adoption.

Financial Strengths

As of Sept. 30, Compass Minerals had roughly $900 million in net debt. A net debt/adjusted EBITDA ratio of 4.4, well above management’s long-term target of 2.5 times. The company’s leverage has been elevated since adding about $600 million in debt in 2016 to help fund the Produquimica acquisition that has since been divested. Leverage ratios have remained high even after Compass completed the divestiture of two noncore assets in order to pay down debt due to cost inflation weighing on salt profits. the company’s leverage ratio will decline in fiscal 2023 as salt prices increase and costs inflation stabilizes, restoring EBITDA and increasing free cash flow. This should allow the company pay down debt over the next couple of years. Additionally, management cut its annual dividend to $0.60 per share from $2.88, which should save the company an estimated $80 million a year. Much of the future savings will go toward paying down debt over the next several years. Finally, Compass raised $252 million in equity from Koch Industries. Of the proceeds, $200 million will be used to fund the majority of the initial phase of the company’s lithium project, while the remainder will be used to pay down debt. As Compass generates higher EBITDA and cash flows and pays down debt, Compass’ net leverage ratio will fall closer to management’s long-term target of 2.5 times over the next several years. While headline credit metrics will fluctuate in the coming years according to variations in winter weather and fertilizer prices, leverage is to remain, on average, at manageable but elevated levels.

Bulls Say

Compass holds a portfolio of cost-advantaged assets, including the Ontario rock salt mine and brine operations at the Great Salt Lake in Utah.
Highway deicing salt prices are relatively stable, and Compass’ average selling prices in this area have increased over time.
Compass’ plans to enter the lithium and fire-retardant markets will create long-term value as strong demand growth in these industries should lead to incremental profit growth.

Company Description

Compass Minerals currently produces two primary products: salt and specialty potash fertilizer. The company’s main assets include rock salt mines in Ontario, Louisiana, and the United Kingdom and a salt brine operation at the Great Salt Lake in Utah. Compass’ salt products are used for deicing and also by industrial and consumer end markets. The firm also sells sulfate of potash, which is used by growers of high-value crops that are sensitive to standard potash. Compass is expanding its portfolio and plans to enter the fire-retardant market, with its magnesium chloride-based product used to combat forest fires. The company also plans to enter the lithium market. Compass will produce magnesium chloride and lithium as byproducts from its sulfate of potash operation in Utah.

(Source: Morningstar)

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