Compass Minerals: Lithium Project Suspension Sinks Shares

Compass Minerals CMP announced it has suspended the development of its lithium project indefinitely because of regulatory uncertainty in the state of Utah. We have updated our model to assume just a 25% chance the project enters production, versus our prior base-case assumption of a 100% chance the project moves forward. We have also revisited our forecasts for the salt and plant nutrition businesses. Having updated our model, our fair value estimate is now $45 per share, down from $65. Excluding lithium, we value Compass Minerals at $35 per share in our base case, with the remaining $10 per share reflecting our 25% probability-weighted valuation of the lithium project.

Compass shares were down nearly 6% on the day as the company announced the lithium project suspension. At current prices, we view Compass shares as undervalued, with the stock trading at nearly half of our updated fair value estimate and at more than a 30% discount to our stand-alone Compass Minerals fair value estimate excluding lithium.

For investors, Compass should see profits recover in salt. Assuming a more normal upcoming winter, we think Compass should benefit from higher prices from the recently concluded bid season and improved volumes, leading to profit growth. Longer term, the salt business should benefit from price increases outpacing cost inflation, leading to slightly higher margins over the next couple of years. Additionally, we expect the recently developed wildfire retardants business to grow in 2024, boosting overall profits.