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. The metric 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 7.1x, which is 6% higher than the average of its last four-year valuation multiple. BHP Billiton (BHP) and Rio Tinto (RIO) are trading at multiples of 6.0x and 6.1x, 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 9.0x.
Vale is not only trading at a slightly higher multiple to its historic multiple, it’s also trading at a higher multiple to its peers, compared to where it has traded historically. The current premium to BHP and RIO is 18% and 19%, respectively, while the average historical premium was 0.3% and 5%, respectively.
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 has 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 an upside going forward, and any major asset sale announcement could be a positive catalyst.
That said, the major catalyst for these miners lies in rising commodity prices (COMT)—especially iron ore prices.
Continue to the next and final part for a look at Vale’s latest analyst recommendations.