The EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple is a widely used valuation multiple for capital-intensive industries such as metals and mining. It takes into account the capital structure of the company. With the help of this multiple, we can value a company with respect to its peers.
Vale’s EV-to-EBITDA compared to its peers
Vale SA (VALE) has a forward EV-to-EBITDA multiple of 7.1x, which is 48.0% higher than its five-year historical average. BHP Billiton and Rio Tinto (RIO) are trading at multiples of 6.2x 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 large projects.
There are many uncertainties about Vale regarding debt reduction and capex funding. Its peers are in a somewhat safer position for 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.
The recent strength in iron ore, coal (KOL), and nickel prices have also provided a nice tailwind for Vale. However, that’s already reflected in its valuation multiple, which has risen 36.0% since the beginning of the year.
Considering all these factors, Vale is probably fairly valued at its current valuation. Any long-term positive catalyst for commodity prices or the reduction in debt for the company could provide an upside from here. 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.