Is Vale SA Fairly Valued Compared to Its Peers?



EV-to-EBITDA multiple

The EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple is a widely used relative valuation multiple for capital-intensive industries such as metals and mining. It takes into account a company’s capital structure. By using this multiple, we can value a company with respect to its peers.

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Vale’s EV-to-EBITDA compared to its peers

Vale SA (VALE) has a forward EV-to-EBITDA multiple of 6.7x, which is 10% higher than its five-year historical average. BHP Billiton and Rio Tinto (RIO) are trading at multiples of 7.8x and 7.1x, respectively. Cliffs Natural Resources (CLF) isn’t directly comparable to these miners since it has a very small presence in the seaborne market. It has a higher multiple due to its long-term contracts.

Is Vale fairly valued?

Vale’s iron ore production is expected to rise as its S11D project ramps up. This will also bring down its unit costs. Its debt is still a huge cause for concern. Vale has higher capex (capital expenditure) requirements than its peers since it has been investing heavily in big projects.

There are many uncertainties surrounding Vale regarding debt reduction and capex funding. Its peers are in a somewhat safer position as far as balance sheet strength and capex requirements. However, since Vale has shown its willingness to sell its core assets and derisk its balance sheet, analysts have started turning positive on the stock.

Considering all these factors, Vale is likely valued fairly at its current valuation, as it’s trading at a slight discount to its peers. The upside from here could be limited since there’s a great deal of uncertainty. Any major asset sale announcement, however, could be a positive catalyst.

Before investing, you should know your risk-taking ability. You can also invest in metals and mining ETFs such as the SPDR S&P Global Natural Resources ETF (GNR), the SPDR S&P Metals and Mining ETF (XME), and the iShares MSCI Brazil Capped (EWZ). Rio Tinto forms 1.8% of GNR’s holdings.


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