Valuation multiple re-rating?
During Vale Day on December 6, 2017, Vale (VALE) CFO (chief financial officer) Luciano Siani Pires said that the company deserves a valuation re-rating due to its improved predictability, transparency, and better governance practices.
Currently, Vale has a forward EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple of 5.7x, 10.0% lower than its five-year average. Diversified miners (GNR) Rio Tinto (RIO) and BHP Billiton (BHP) are trading at similar multiples, of 5.9x and 5.6x, respectively. While Cleveland-Cliffs (CLF) is trading at a forward multiple of 5.8x, it’s not directly comparable to the other miners due to its smaller seaborne iron ore footprint and the nature of its contracts and products.
Since last year, Vale has shown a sincere desire to be more transparent and predictable. Changes in corporate governance policies, a more independent board, and less potential for government interference are certainly steps in the right direction. Its predictability and sustainability have improved, its capital expenditure is lower, and its dividends have been made more robust and transparent.
Its most ambitious and important project, S11D, is proceeding as scheduled. The project has the potential to reduce its iron ore unit costs below $10 and boost volumes. The company is also working to diversify its earnings away from iron ore. Higher base metal earnings should lead to this diversification and help the company, which would remain an almost pure play on iron ore but derive earnings from other commodities. These factors could help Vale stock re-rate.
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