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Which Iron Ore Miners Currently Look Undervalued or Overvalued?

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Nov. 20 2020, Updated 4:05 p.m. ET

Valuation 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 compare companies’ valuations.

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Miners’ EV-to-EBITDAs

Vale (VALE) has a forward EV-to-EBITDA multiple of 7.1x, which is 14.0% higher than its five-year historical average. BHP Billiton (BHP) 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 because 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, as it’s been investing heavily in big projects. Considering all these factors, Vale is probably fairly valued at its current valuation. Any long-term positive catalysts for commodity prices or reductions in debt for the company could provide it with upside going forward. Any major asset sale announcement could be a positive catalyst.

While BHP is trading at a 10% discount to its historical average multiple, Rio is trading at a 10% premium. Given crude oil’s brighter outlook as OPEC (Organization of the Petroleum Exporting Countries) decides to cut production, BHP’s valuation could see an upside going forward.

Rio has received a boost due to its recent announcement regarding $5 billion of additional free cash flow generation through productivity improvements. That being said, the major catalyst for these miners lies in rising 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 and iron ore miners.

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