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How Are Markets Valuing Glencore amid Higher Commodity Prices?

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Valuation

While several metrics can be used to value a company, for capital-intensive industries like mining (EWU) (UKX-INDEX), the EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple is the preferred valuation metric. The forward EV-to-EBITDA multiple tells us how a company is valued for each dollar of EBITDA. In this article, we’ll do a comparative analysis of leading copper miners’ forward EV to EBITDA.

Comparative analysis

Freeport-McMoRan (FCX) is trading at 5.94x its 2017 consensus EBITDA and at 4.62x its consensus 2018 EBITDA. Antofagasta (ANTO) is trading at 6.52x its 2017 consensus EBITDA and 6.42x its consensus 2018 EBITDA. Glencore (GLEN-L) has an EV-to-EBITDA of 6.53x based on its consensus 2017 EBITDA. It’s trading at 6.33x its 2018 consensus EBITDA.

Southern Copper (SCCO) has the highest forward EV-to-EBITDA multiples among the copper miners that we’re discussing in this article. The company is valued at 10.83x its 2018 consensus EBITDA. Anglo American has the lowest valuation multiple among our select group of copper miners as can be seen in the graph above.

Key drivers

However, we should read valuation multiples with caution. For instance, Southern Copper’s valuation multiples are higher likely due to the company’s growth prospects. Southern Copper expects its copper production to rise in the next couple of years. Furthermore, mining companies’ valuation multiples tend to bottom near cyclical peaks while valuation multiples are generally the highest near cyclically low commodity prices.

In the next and final article, we’ll see which copper miners analysts are bullish on.

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