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 the metals and mining industry. It takes into account a company’s capital structure. By using this multiple, we can compare companies’ valuations.
Mining companies’ EV-to-EBITDAs
BHP Billiton (BHP) is trading at a forward EV-to-EBITDA of 5.1x, which represents a 25% discount to its trailing-five-year average multiple.
Vale (VALE) has a forward EV-to-EBITDA multiple of 7.3x, which is almost same as its trailing-five-year average. Rio Tinto (RIO) is trading at a multiple of 5.1x, which represents a discount of 5% 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’s trading at a forward multiple of 6.5x.
What’s the upside?
BHP is trading at a 25% discount to its historical average multiple. Along with iron ore prices, oil prices have also driven BHP’s valuation. Coal prices seem to be supported by a supply shortage, which could provide further support to BHP. An overhang could remain on BHP’s shares until any resolution on Elliott’s proposals is reached.
The major catalyst for these miners lies in rising commodity prices (COMT), especially iron ore prices. Meanwhile, Cliffs will likely be the most impacted by changes in steel prices in the US domestic market.