What Might Lead to a Valuation Upside for BHP?


Aug. 29 2017, Updated 7:37 a.m. ET

Mining peers’ EV-to-EBITDA

BHP Billiton (BHP) is trading at a forward EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple of 6.1x. It’s currently the highest compared its close iron ore peers Rio Tinto (RIO) and Vale SA (VALE). But it’s still at a discount of 7.0% compared to its last five-year average historical multiple.

Rio Tinto is trading at a forward multiple of 5.8x, which is a discount of 8.0% compared to its last five-year average. Vale has a forward multiple of 4.3x, which represents a 40.0% discount to its historical average multiple.

Cliffs Natural Resources (CLF), which is mainly a US-focused player with only a small direct exposure to the seaborne iron ore market, is trading at a forward multiple of 5.5x.

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What’s the upside?

BHP is trading at a 7.0% discount to its historical average multiple. That’s mostly due to a weaker outlook for crude oil prices as well as other commodities. The recent appointment of a new chair for its board of directors has been hailed by many in the market as a positive shift. Other board changes are also seen as a sign that the miner is shifting its strategy and focusing more on value. Some believe that along with the spin-off of its oil assets, these factors could be the next catalyst for the stock.

That being said, the major catalyst for these miners could lie in rising commodity prices (COMT), especially iron ore prices. Cliffs Natural Resources could be impacted the most by changes in steel prices in the US domestic market.


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