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.
Mining peers’ EV-to-EBITDA
BHP Billiton (BHP) is trading at a forward EV-to-EBITDA of 6.0x, which represents an 11% discount to its last five-year average multiple.
Vale (VALE) has a forward EV-to-EBITDA multiple of 7.1x, which is 5% higher than its average of its last five-year valuation multiple. Rio Tinto (RIO) is trading at multiples of 6.0x, which represents a discount of 7% to its historical average multiple.
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 9.5x.
What’s the upside?
BHP is trading at an 11% discount to its historical average multiple. 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.
That said, the major catalyst for these miners lies in rising commodity prices (COMT)—especially iron ore prices. Meanwhile, Cliffs will likely be most impacted by changes in steel prices in the US domestic market.