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 6.6x, which is almost same as the average of its last four-year valuation multiple. BHP Billiton (BHP) and Rio Tinto (RIO) are trading at multiples of 5.9x 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, with a forward multiple of 13.1x.
Vale’s iron ore production is expected to rise as its S11D has started commercial production in December 2016. 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.
Given 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.
BHP Billiton, Rio Tinto, and Cliffs
While BHP is trading at a 13% discount to its historical average multiple, Rio is trading at an 11% 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. Coal prices also seem to be supported due to a supply shortage, which could provide further support to BHP.
Rio has received a boost due to its recent announcement regarding $5 billion of additional free cash flow generation through productivity improvements. Its balance sheet is also strong, with upside to shareholder returns. That said, the major catalyst for these miners lies in rising commodity prices (COMT)—especially iron ore prices.
Cliffs, on the other hand, will likely be most impacted by a change in steel prices in the US domestic market and the factors affecting it.
For more information, please read What Factors Will Drive Cliffs Natural Resources’ 2017? Keep checking in with Market Realist’s Iron Ore page for the latest updates on iron ore prices and iron ore miners.