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Could We See Valuation Upside for BHP in 2018?

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BHP’s EV-to-EBITDA

BHP Billiton (BHP) is trading at a one-year forward EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple of 6.75x. This multiple implies a premium of 8% to its last-five-year average multiple.

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BHP peers’ multiples

Its closest peer, Rio Tinto (RIO), is also trading at a similar multiple of 6.8x, implying a 10% premium to its last-five-year trailing multiple. Vale SA (VALE) is trading at a higher multiple of 7.2x, a 4.0% premium to its historical multiple. The company has made some positive moves recently, including improving corporate governance practices, reducing debt, and lowering costs. Its multiple has improved ~40% since July 2017.

Cliffs Natural Resources (CLF), which is mainly a US-focused player with little direct exposure to the seaborne iron ore market, is trading at a forward multiple of 8.10x—which is still lower than its last five-year average of 9.05x. In the seaborne market, the company is attracting discounts due to lower-grade ore. In the US market, higher steel imports are impacting the company as well as its US peers negatively.

What’s the upside?

The recent appointment of a new chairman has been regarded as a positive for BHP. Other recent changes—including the decision to exit the US shale business—have also been seen as a positive strategic shift.

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

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