I’m looking at buying shares in Compass Minerals (NYSE:CMP) for my portfolio. In my view, the company combines the best elements of an income stock with some serious growth potential.
Historically, the company has been a dividend stock that made money by producing salt and specialty fertiliser. Recently, though, the outlook for the business has changed.
Last July, Compass Minerals identified a sustainable source of around 2.4m tons of lithium. The resource is at a site where it already has existing infrastructure.
I think that company has significant prospects for earnings growth. And its steady commodities business sets it apart from other lithium stocks.
Salt and SoP
Compass Minerals currently produces salt and a specialty fertiliser, sulfate of potash (SoP). I think that these operations are fascinating (really!) but I won’t go into the details here.
Suffice to say that a commodities business like this one comes down to the quality of its assets and the cost of its shipping. And Compass Minerals has huge advantages in both.
The company’s Goderich salt mine is one of the largest in the world, which allows for efficient operations. It is also located on a deep water port, which makes transportation costs low.
Compass Minerals also owns a SoP source in the Great Salt Lake. It’s one of only three natural sources in the world and it’s great for producing specialty fertiliser at a low cost.
This resource is what’s catching my eye. But I’m not that interested in its efficient SoP operations – I’m interested in its lithium potential.
Lithium
Compass Minerals plans to produce lithium as a byproduct of its SoP operations. I think this gives an otherwise steady income stock some explosive growth possibilities.
Lithium is important as a battery metal. As the number of electric vehicles increases over the next few years, I expect demand for the metal to increase substantially over the next few years.
According to a report I read, the increase in lithium demand could be around 600% over the next decade. If this happens, Compass Minerals is extremely well positioned to benefit.
Lithium production is expected to come online in 2025. But the organisation already has an agreement with Ford to supply the metal for its car batteries.
The company’s SoP operations mean that it already has infrastructure in place at its site. This means that it will only have to build processing facilities in order to produce lithium.
This gives Compass Minerals a lower start-up cost than its competitors. And this is important for commodity production.
Investment thesis
There are a few risks to consider with Compass Minerals. The most significant, in my view, the threat of global warming.
Most of the salt the company sells is used for de-icing roads. As such, warmer temperatures might result in lower demand for its core product.
For me, though, that’s the part of the benefit of the company’s lithium exposure. Even if salt volumes do decline, I expect this to be more than offset by revenues from lithium production.
That’s why I think that Compass Minerals has the best qualities of an income stock combined with potential for serious earnings growth. And that’s why I’m looking to buy the stock for my portfolio.
