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Can Vale’s Valuation Re-Rate Higher in 2018? Key Catalysts

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Mar. 7 2018, Updated 7:30 a.m. ET

Valuation multiple rerating?

Vale’s CFO, Luciano Siani Pires, said during Vale Day on December 6, 2017, that the company deserves a rerating of its valuation. He listed more predictability, transparency, and better governance as the catalysts for a higher valuation.

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Relative valuation

Currently, Vale (VALE) has a forward EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple of 6.2x, which is a discount of 3.1% to its past five-year average multiple.

Diversified miners (GNR) Rio Tinto (RIO) and BHP Billiton (BHP) are trading at similar multiples of 6.1x and 6.1x, respectively.

Cleveland-Cliffs (CLF) is trading at a forward multiple of 6.3x. However, it’s not directly comparable to these miners due to its smaller seaborne iron ore footprint and the nature of its contracts and products.

Valuation catalysts

As we’ve seen in the previous parts of this series, Vale’s S11D project is proceeding as scheduled. The project has the potential to reduce its iron ore unit costs below $10, along with a significant increase in volumes. Plus, the company has adopted transparent governance policies, which had been a concern. The company is also working to diversify its earnings away from too much reliance on iron ore. The increase of base metals earnings should lead to this diversification and help the company, as it would remain a nearly pure play on iron ore but derive earnings from other commodities. These factors could help Vale stock.

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