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 compare companies’ valuations.
Vale (VALE) has a forward EV-to-EBITDA multiple of 6.9x, which is 12% higher than its five-year historical average. BHP Billiton (BHP) and Rio Tinto (RIO) are trading at multiples of 8.0x 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.
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. Considering all these factors, Vale’s current valuation is likely fair, 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.
For BHP and RIO, the major catalyst lies in the increase in commodity prices (COMT), especially iron ore prices. Cliffs, on the other hand, would be most impacted by a change in steel prices in the US domestic market and the factors affecting it.
Keep watching Market Realist’s Iron Ore page for the latest updates on iron ore prices. We’ll update our analyses on iron ore miners after their 3Q16 results.