Cliffs Natural Resources (NYSE:CLV) closed at $18.55 yesterday. At that price CLV offers 10.5% per share. Originally offered at $25.00 per share, CLV can now be purchased well below the offering price. It is designed to pay distributions of 7.00% per annum ($1.75 per annum or $0.4375 per quarter) to be paid quarterly on 2/1, 5/1, 8/1 & 11/1 to holders of record on the immediately preceding 1/15, 4/15, 7/15 & 10/15 respectively.
One would think that Cliffs Natural Resources was teetering on bankruptcy with a preferred stock selling this far below $25.00. However this is not the case, CLF is a well run company that's selling its commodity production at lower prices than in the recent past. Bloomberg reported April 24 that the company is handling this downturn reasonably well and reported profits higher than predicted. Rather it is the structure of this preferred that causes people to be concerned about what it is truly worth.
The shares of this preferred must be converted to common stock on 2/1/2016. The conversion rate is based upon a complex formula that is related to the selling price of the common stock at the time. Each 100 shares of the preferred will be converted to 70 to 86 shares of the common depending on the price of the common on that date. If the current market price of the common on that date is greater than $35.53, one will profit from the conversion. If the current market price of the common is less than $29.00, one will lose money on the conversion.
Currently CLF or the common is selling for $18.22 per share. If the conversion took place yesterday one would lose considerable money on the conversion.
This preferred offers a real bargain if the price of iron ore goes up to the prices seen 2 years ago. The fluctuation of the price of iron ore will likely give investors an opportunity over the next 2 years to get out of this preferred at a profit if one is concerned about the conversion. On the other hand, this is a great way to invest in CLF and get a 10% return while waiting for the conversion to common stock if one is bullish on CLF in the future.
Disclosure: I am long CLV. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.