What Could Drive Cliffs’s Valuation in 2017?



Valuation multiples

Valuation multiples are key metrics that investors should consider carefully. To compare a company’s valuation with its closest peers’, there are several valuation metrics you can use.

For companies in cyclical industries such as steel (SLX) and mining, the EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple is the preferred valuation metric. The forward EV-to-EBITDA multiple tells us how a company is valued for each dollar of its EBITDA.

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Cliffs Natural Resources’ valuation

The chart above shows the forward EV-to-EBITDA multiples of various steel companies, some of which have captive iron ore mines. The valuation multiples of these major players have risen in the last few months, due to higher prices following Donald Trump’s US presidential win.

Companies such as U.S. Steel Corporation (X), Nucor (NUE), Steel Dynamics (STLD), and AK Steel (AKS) are trading at premiums to their long-term trading multiples. U.S. Steel’s and AK Steel’s valuation multiples have been re-rated by 25% and 48%, respectively, since the US election.

Cliffs Natural Resources (CLF) is trading at a forward EV-to-EBITDA multiple of 12.3x. Its multiple has seen a re-rating of 13% since the US election. Most of these positives, for the time being, seem to have been priced into the stock.

Key catalysts

US (VTI) steel prices and seaborne iron ore prices are expected to remain the major drivers of Cliffs Natural Resources’ valuation going forward. Watch CLF’s 4Q16 results for any further updates regarding its debt reduction or venture into the direct reduced iron business. These could act as positive catalysts for the company’s valuation. Meanwhile, keep checking Market Realist’s Iron Ore page for the latest updates.


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