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These Iron Ore Stocks Could Offer a Valuation Upside in 2017

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Nov. 20 2020, Updated 12:21 p.m. ET

EV-to-EBITDA multiples in mining

Vale SA (VALE) has a forward EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple of 4.3x, which represents a discount of 37% compared with its past five-year average multiple.

Rio Tinto (RIO) and BHP Billiton (BHP) are trading at forward multiples of 5.8x and 5.6x, respectively.

Cliffs Natural Resources (CLF), which is a US-focused player, has some exposure to the direct seaborne iron ore market. It’s therefore not directly comparable to these other mining companies but is trading at a forward multiple of 6.1x.

Recently, Vale’s multiple has suffered due to weakness in commodity prices and the political turmoil in Brazil. Its weaker-than-expected 1Q17 results didn’t help its valuation either.

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However, Vale’s fundamentals remain sound, with an expectation of production growth and unit cost reduction in the near future. While its debt is still a concern for investors, Vale’s focused approach on debt reduction should turn analysts and investors more bullish on the stock, which could lead to a re-rating. Any major asset sale announcement could be a positive catalyst.

BHP Billiton, Rio Tinto, and CLF

BHP Billiton is also trading at a discount of 15% to its historical average multiple, while Rio Tinto is trading at a 10% discount. Along with iron ore prices, oil prices have also driven BHP’s valuation. The recent appointment of the new chairman is being seen as positive by many analysts. A shift in strategy and the spin-off of its oil assets could be the next catalyst for the stock.

Rio Tinto received a boost from its recent debt-reduction announcement. Its balance sheet also remains strong, with an upside to shareholder returns. The major catalyst for these miners lies in rising commodity prices (COMT), especially iron ore prices.

Cliffs Natural Resources (CLF), as well as its US peers, are awaiting the outcome of the Section 232 probe into the US steel imports. A favorable outcome could mean an instant rise in valuation for these stocks, as analysts upgrade their earnings estimates. Any other positive announcement about Cliffs’ new plant should also act as a positive catalyst.

For more on Cliffs’ 2Q17 expectations, please read Market Realist’s What to Expect from Cliffs Natural Resources’ 2Q17 Earnings.

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