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Which Iron Ore Miners Can Offer Valuation Upsides in 2017 and Beyond?

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Nov. 20 2020, Updated 1:06 p.m. ET

EV-to-EBITDA multiples in mining

Vale SA (VALE) has a forward EV-to-EBITDA[1. enterprise value to earnings before interest, tax, depreciation, and amortization] multiple of 6.1x, reflecting a 10% discount to its past five-year average multiple. The multiple for Vale, however, has improved by 42% since the end of July. 

While Vale has traditionally traded at a significant valuation gap to its peers, the gap has now narrowed. This is mainly due to the expectations of lower unit costs for the company going forward and its reducing debt. The positives are most likely priced into the stock now.

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BHP Billiton and Rio Tinto

Rio Tinto (RIO) and BHP Billiton (BHP) are trading at forward multiples of 5.9x and 6.4x, respectively, for five-year discounts of 7.3% and 2.3%, respectively.

Along with iron ore prices, oil prices are also driving BHP’s valuation. The recent appointment of the new chairman is seen as a positive factor by many analysts. This could herald a shift in strategy. The sell-off of its oil assets could be the next big catalyst for the stock.

Rio Tinto stock received a boost from its recent debt-reduction announcement. The company’s 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.

Cleveland-Cliffs

Cleveland-Cliffs (CLF) is a US-focused player with a small direct exposure to the seaborne iron ore market. So, it is not directly comparable to these other iron ore miners. CLF is trading at a forward multiple of 6.4x, and it is trading at the highest discount of 33% to its last five-year multiple. 

Along with seaborne iron ore prices, events in the US steel market such as the Section 232 probe and US steel imports data are also impacting Cleveland-Cliffs’ estimates and its multiples. A favorable outcome for the Section 232 probe could mean a noticeable rise in valuation for Cleveland-Cliffs and its US peers.

For more information on Cleveland-Cliffs’ 2Q17 results, please read Market Realist’s Cliffs Natural Resources’ Stock Falls despite Q2 Earnings Beat.

Keep checking in with Market Realist’s Iron Ore page for the latest updates on iron ore prices and iron ore mining companies.

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