Vale (VALE) now has a forward EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple of 5.4x. This implies a discount of 24.0% to its past five-year average multiple.
Cleveland-Cliffs (CLF), which is not directly comparable to these miners due to the difference in its target market, the nature of contracts, and products, is trading at a forward multiple of 5.7x.
All these miners have seen corrections in their forward multiples in 2017. The slump in commodity prices, especially in iron ore, is the most likely reason for the overall correction, in addition to company-specific factors. Vale’s forward multiple has fallen 27% in 2017 year-to-date.
Historically, Vale stock has traded at a discount to its close peers (GNR), mainly due to the following:
- the longer distance between Brazil and China, main seaborne iron ore importer, compared with the distance between its Australian peers
- its higher debt level compared with peers, making it much more leveraged to the volatilities of commodity prices.
Another factor that has impacted Vale’s multiple negatively is its corporate governance policies. In 2017, Vale has worked to improve its governance and to be more transparent with shareholders.
Meanwhile, Vale’s S11D project is proceeding as scheduled. This project has the potential to reduce its iron ore unit costs below $10.00, along with a significant increase in volumes. These factors could help Vale stock going forward.
In addition to S11D, a faster reduction in the company’s debt could help alleviate investor concerns about the stock. Apart from these company-specific factors, the major catalyst for these miners will likely be rising commodity prices (COMT) (GNR)—especially iron ore prices.